Comments       on       the 

Railroad  Problem 


BY 


ROBERT   S.    LOVETT 

President,  Union  Pacific  System 


NEW    YORK 
JULY,  1919 


The  Railroad  Problem 

Comments  on  Certain  Methods 
Suggested  for  Solving  It 


BY 

ROBERT   S.    LOVETT 

President,  Union  Pacific  System 


NEW  YORK 
JULY,  1919 


CONTENTS 

PAGE 

I.   THE  WEAKNESS  OF  CERTAIN  PROPOSED  PLANS... 4-27 

A.  The  Problem  of  the  Strong  and  the  Weak  Companies 5 

B.  The  Plan  to  Consolidate  all  Roads  into  a  Few  Systems.  .  .  .7 

C.  The  Pooling  of  Net  Earnings 13 

D.  A  Guaranty  by  the  Government 24 


II.   THE  SOUND  REMEDY 28-76 

A.  That  Congress  Establish  a  Rule  of  Rate  Making 29 

B.  Compulsory  Federal  Incorporation 37 

C.  Exclusive  Federal  Regulation  of  Railroad  Securities 50 

D.  Exclusive  Federal  Regulation  of  Freight  and  Passenger 

Rates 57 

E.  Creation  of  a  Government  Department  of  Transportation,  69 


Comments  on  Certain  Methods  Suggested 

for  Solving  the 
Railroad   Problem 


BY  ROBERT  S.  LOVETT 

President,  Union  Pacific  System 


In  the  discussion  of  the  Railroad  Problem  now 
before  Congress,  it  seems  safe  to  assume  that  the 
following  propositions  are  too  clear  to  require  or 
admit  of  argument: 

1.  That  it  is  necessary  for  Congress  to  enact,  at  the 
earliest  date  practicable,  legislation  required  to  develop 
and  continue  to  provide  the  railroad  facilities  which  the 
country  must  have. 

2.  That  the  country  has  definitely  made  up  its  judg- 
ment against  the  ownership  and  operation  of  the  rail- 
roads by  the  Government. 

3.  That  public  opinion  overwhelmingly  favors  the 
continuance,  by  private  ownership,  of  competition  in 
service  and  facilities  furnished  by  railroad  carriers. 

It  will  be  assumed,  therefore,  that  these  propo- 
sitions are  established,  and  they  will  not  be 
discussed. 


COMMENTS     ON     THE     RAILROAD     PROBLEM 


I 

The  Weakness  of  Certain 
Proposed  Plans 

Plans  for  solution  of  the  problem  have  been 
presented  in  such  number,  and  discussion  has  taken 
such  a  wide  range,  that  Congress  must  be  confused 
by  the  multitude  of  suggestions.  Probably  every 
theory  of  railroad  regulation  has  been  presented; 
and  many  of  these  theories,  while  plausible  and 
attractive  in  the  abstract,  are  impracticable  when 
applied  to  actual  conditions. 

The  situation,  however,  is  very  real,  and  we 
must  deal  with  actualities. 

We  have  to  deal  with  about  275,000  miles  of 
railroad,  serving  the  growing  commerce  of  a  nation 
of  over  one  hundred  millions  of  people,  and  rep- 
resenting an  investment  of  nearly  twenty  billions 
of  dollars,  owned  by  all  classes  of  citizens,  and  by 
savings  banks,  insurance  companies,  and  financial 
institutions  of  every  kind. 

The  effect  of  every  radical  proposition  upon  this 
situation,  therefore,  should  be  studied  carefully 
before  it  is  adopted.  It  is  not  an  occasion  for 
experiments.  Hence  it  is  proper  to  examine  at 
the  outset  some  of  the  proposals  which  appear  to 
be  of  this  character. 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 


A^      The  Problem  of  the  Strong  and  the 
Weak  Companies 

Most  of  the  discussion  recently  has  centered 
about,  and  given  great  prominence  to,  the  sup- 
posed difficulty  presented  by  the  case  of  the  strong 
and  the  weak  companies  operating  railroads  in 
competition. 

It  is  of  course  necessary  that  the  transportation 
rates  should  be  the  same  on  both  roads,  since  other- 
wise the  lower  rate  would  attract  all  the  business. 

The  difficulty  arises  because  a  rate  high  enough 
to  make  the  weak  or  inefficient  road  reasonably 
profitable,  it  is  assumed  would  make  the  strong  or 
efficient  road  unduly  profitable. 

Various  remedies  for  strengthening  the  weak  and 
reducing  the  strong  have  been  proposed — all 
assuming,  without  showing,  that  this  is  wise  and 
necessary. 

Why  Many  Roads 
Are  Weak 

Now,  many  of  the  weak  roads  are  weak  because 
they  serve  territories  which,  for  various  reasons, 
afford  but  little  traffic — sparsely  settled,  poor  in 
agricultural  or  other  production,  etc. — but  which 
nevertheless  are  giving  the  service  which  the 
traffic  justifies. 

I  presume  no  one  expects  service  substantially  out 
of  proportion  to  the  traffic. 

Some  of  the  weak  roads  are  weak  because  they 
are  in  competitive  territory.  Their  traffic  is  com- 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

petitive,  and  they  are  not  able  to  get  sufficient 
traffic  away  from  rivals  to  become  prosperous. 
These  roads  are  not  so  vital  to  the  community, 
because  the  competing  roads  afford  the  transpor- 
tation required. 

Other  roads  are  weak  as  a  result  of  mistakes  in 
policy,  unsound  financing,  or  bad  management; 
and  many  because  building,  in  the  first  instance, 
never  was  justified  by  the  traffic  obtainable. 

All  weak  roads,  however,  are  put  in  the  same 
category  in  the  discussion  seeking  relief  for  them, 
regardless  of  the  cause  of  their  condition  or  the 
public  necessity  for  more  service  than  they  are  now 
performing. 

The  Fallacy  of 
"Book  Value" 

True,  many  propose  as  a  basis  of  the  remedies 
they  suggest  that  the  real  value  of  each  road  shall 
be  ascertained,  but  others,  and  perhaps  the  most 
numerous  advocates,  propose  that  the  property 
investment  account,  or  the  "book  value,"  of  these 
roads  shall  be  taken  as  their  value  for  rate-making 
purposes;  whereas  the  book  value  includes,  in 
probably  all  cases,  the  par  value  of  the  stock  and 
bonds  kept  alive  and  now  outstanding  regardless  of 
earnings  or  actual  value. 

Furthermore,  in  the  discussion  little  attention 
has  been  paid  to  the  fact  that  the  business  of  the 
country  is  not  handled  by  the  so-called  iveak  roads. 

That  is  generally  the  reason  why  they  remain  weak. 
They  have  not  enough  business,  either  because  the 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

territory  they  serve  does  not  produce  it,  or  because 
their  more  efficient  rivals  are  able  to  get  it  through 
competition. 

The  congestion  of  traffic  in  1917-1918  did  not  occur 
on  the  weak  roads,  but  on  the  so-called  strong  roads. 

Very  few  of  the  weak  lines  were  taxed  except  by  the 
overflow  of  traffic  in  excess  of  what  the  strong  lines 
could  handle.  This  was  because  the  bulk  of  the 
traffic  is  normally  on  the  strong  lines;  and  this  tends 
to  make  them  strong.  In  time  of  stress,  the  burden 
naturally  falls  upon  these  lines. 

But  under  the  Government  policy  of  inflexible 
or  declining  transportation  rates  for  a  number  of 
years,  during  which  wages  and  other  operating 
costs  have  been  rising,  the  strong  roads  have  found 
difficulty  in  getting  capital  to  provide  the  additional 
main  tracks,  terminals,  equipment  and  other 
facilities  for  handling  the  growing  traffic. 


B^     The  Plan  to  Consolidate  All  Roads 
Into  a  Few  Systems 

It  is  undoubtedly  true  that  the  existence  of 
financially  strong  roads  and  weak  roads  in  the  same 
locality  owning  lines  competing  with  each  other, 
presents  a  serious  difficulty  if  it  is  the  determina- 
tion of  the  Government  to  add  value  to  some  and 
take  value  from  others  by  law. 

One  of  the  methods  suggested  for  overcoming  the 
difficulty  arising  from  the  existence  of  strong  and 
weak  roads  in  competitive  territory  is  by  the 
consolidation  of  all  railroads  into  a  few  systems. 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

There  is  insistence  by  some  very  eminent  authori- 
ties on  railroad  affairs  and  in  matters  of  law  and 
finance  that  all  the  railroads  of  the  country  should 
be  consolidated  into  a  few  large  systems — from 
twelve  to  twenty-five  in  number — in  order  that 
the  weak  may  be  supported  by  the  strong. 

By  merging  the  poor  roads  with  the  prosperous 
in  a  large  traffic  territory,  it  is  said  that  rates  could 
be  made  which  would  yield  a  fair  return  on  the 
property  as  a  whole,  which,  without  such  consoli- 
dation, would  impoverish  some  and  enrich  others. 

The  Outstanding  Necessity 
Before  Congress 

The  outstanding  necessity  confronting  Congress 
and  the  task  before  it,  as  I  understand,  is  to  enact 
legislation  that  will  restore  the  confidence  of 
investors  and  establish  the  credit  of  the  carriers,  so 
that  the  money  necessary  to  provide  and  keep  up 
the  railroad  facilities  of  the  country  may  be 
obtained. 

The  advocates  of  consolidation,  however,  fail  to 
point  out  how  their  plan  will  accomplish  this  object. 

For  example,  it  is  not  apparent  how  the  credit  of 
the  New  York  Central,  or  the  Pennsylvania,  or  the 
Chicago  and  North  Western,  or  the  Burlington, 
or  the  Union  Pacific,  or  the  Atlantic  Coast  Line 
would  be  improved  by  merging  them  with  their 
poor  and  unprofitable  neighbors  and  rivals. 

Instead  of  improving  the  credit  of  the  weak 
road  the  only  effect  of  the  project,  as  it  appears  to 
me,  would  be  to  impair  the  credit  of  the  strong  road. 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

The  inevitable  effect  would  be  to  reduce  the 
average  of  the  credit  of  all  the  railroads. 

The  Credit  of  the  Strong  Roads 
None  Too  Good 

The  credit  of  the  strongest  of  these  roads  has  not 
been  any  too  good  during  the  last  ten  years. 

Their  credit  needs  support  even  more  than  the 
weak  roads,  because  they  have  greater  responsi- 
bility and  greater  burdens  to  bear. 

They  must  provide  the  facilrties  for  the  increased 
traffic  they  serve,  which  inevitably  goes  to  their 
lines  in  times  of  stress. 

Such  credit  as  they  now  have  is  due  to  their 
ability  to  pay  dividends.  Falling  rates  and 
mounting  expenses  and  the  policy  of  state  and 
national  regulations  increasingly  menaced  the 
stability  of  dividends,  and  thus  weakened  the  credit 
of  the  strong  roads. 

*       *       * 

It  seems  to  be  assumed  that  the  strong  roads 
have  been  earning,  in  excess  of  what  they  are 
legally  entitled  to  earn,  an  amount  sufficient  to 
make  up  for  the  inadequate  earnings  of  the  weak 
roads,  and  that  when  the  properties  are  consoli- 
dated and  the  earnings  of  the  group  thus  pooled, 
the  average  will  provide  credit  for  all. 

But  this  is  a  fallacy  which  can  be  demonstrated 
at  the  proper  time.  In  any  event,  the  earnings 
represent  a  value  which  must  be  paid  for  by  the 
consolidated  corporation  when  it  acquires  the 
properties. 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

It  is  fair  to  say  that  the  proponents  of  the  plan  of 
consolidation  do  not  propose,  as  some  other  plans 
contemplate,  the  confiscation  of  the  property  of  the 
stockholders  of  the  strong  roads  for  the  benefit  of  the 
owners  of  the  weak  roads. 

They  do  not  suggest  that  the  property  investment 
account  or  book  value  of  the  property  upon  each 
company's  books  should  be  taken  as  the  measure  of 
value  in  consolidation,  but  that  the  real  value  of  the 
property  should  be  the  basis. 

The  Practical  Difficulties 
of  the  Plan 

But  the  practical  difficulty  of  accomplishing  the 
consolidation  of  all  the  railroads  in  the  United  States 
into  a  comparatively  small  number  of  companies 
seems  to  be  a  conclusive  answer  to  the  suggestion. 

Briefly,  it  is  proposed,  as  I  understand  the  proposi- 
tion, that  Congress  shall  incorporate  a  dozen  or  more 
companies,  each  to  acquire  certain  railroads.  Some 
suggest  that  all  railroads  in  a  certain  territory  to  be 
prescribed  by  the  Interstate  Commerce  Commission 
shall  be  acquired,  but  this,  of  course,  would  absolutely 
eliminate  all  competition,  so  that  I  assume  the  terri- 
torial division  among  these  absorbing  companies  will 
not  be  adopted,  in  view  of  the  almost  universal  desire 
to  preserve  competition. 

Others  suggest  that  all  the  railroads  be  divided 
between  the  absorbing  companies,  not  geographically, 
but  in  such  manner  as  to  have  them  interlace  and  pre- 
serve competition ;  and  if  all  the  roads  are  to  be  merged 
into  a  few  companies,  this  method  should  be  preferred 
to  the  geographical  division. 

Congress  undoubtedly  can  acquire  any  or  all  the 
railroads  of  the  United  States  for  the  Government. 
It  may  also  create  corporations  with  power  to 
acquire  them,  and  consequently  it  may  create 

10 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

several  corporations  to  acquire  all  the  roads  in  a 
prescribed  territory,  or  certain  specified  railroads. 

Congress  Has  No  Right  to 
Compel  Consolidation 

But  Congress  has  no  right  to  compel  one  corporation 
to  consolidate  with  another. 

It  may  give  one  the  right  to  acquire  the  property 
of  the  other  by  condemnation,  but  it  must  pay  for 
it,  and  (here  is  the  difficulty)  pay  for  it  in  cash. 

Congress  has  no  power  to  compel  the  stockholder 
of  the  railroads  to  be  absorbed,  to  accept  in  ex- 
change the  stock  of  one  of  the  dozen  or  more 
companies  which  are  to  absorb.  When  these  ab- 
sorbing companies  acquire  the  railroads  assigned 
to  them,  they  must  pay  the  value  in  cash  to  all  who 
demand  cash. 

Whether  this  will  be  few  or  many,  no  one  knows. 
It  is  certain  that  many  will  demand  cash;  and  then 
it  must  be  provided  if  the  transaction  is  to  be 
accomplished. 

The  "underwriting"  of  a  fabulous  amount  must 
be  provided.  Since  no  one  will  know  in  advance 
how  many  will  demand  cash  instead  of  new 
securities,  the  underwriting  must  be  for  the  entire 
amount. 

Questions  That 
Must  Be  Answered 

Will  Congress  appropriate  the  billions  necessary? 
Have  we  bankers  enough  to  provide  the  money 
except  through  a  series  of  years?  And  what  will 

11 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

happen  to  the  financial  welfare  of  the  country  in 
the  meantime,  and  what  will  the  money  cost? 

The  familiar  mortgage  foreclosure  and  reorgani- 
zation afford  no  analogy.  The  railroad  will  not 
be  sold  at  auction  as  in  those  cases  but  must  be 
paid  for  at  its  value  as  determined  in  proceedings 
conforming  to  due  process  of  law. 

Notwithstanding  the  great  experience  and  ability 
of  some  of  those  who  are  advocating  this  method  of 
consolidation,  I  am  unable  to  bring  myself  to 
believe  that  it  is  practicable,  unless  the  operation 
is  extended  over  a  period  of  perhaps  ten  years  or 
more,  during  which  it  would  be  an  element  of 
constant  disturbance  in  our  financial  affairs. 

I  may  add,  though  perhaps  not  relevant  to  the 
main  point  I  am  discussing,  that  my  judgment  is 
against  the  consolidation  of  all  the  railroads  of  the 
country  into  a  few  companies,  say  from  ten  to 
thirty,  because  I  believe  the  companies  would  be 
too  large  and  unwieldly  for  efficient  and  economical 
management. 

Suggested  Consolidations 
Too  Big 

I  believe  that  railroad  executives  generally  will 
agree  that  railroad  systems  may  be  made  too  big — 
that  there  are  limits  beyond  which  a  railroad  sys- 
tem should  not,  in  the  interest  of  economy  and 
efficiency,  be  extended  by  consolidation  with  or 
acquisition  of  other  lines.  I  am  very  confident 
that  this  is  true. 

More  important  still,  consolidation  should  not 

12 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

be  arbitrary.  Each  should  be  for  a  definite  purpose 
and,  where  the  Government  regulates,  for  a  definite 
public  benefit. 

I  am  entirely  in  accord  with  the  policy  of 
removing  some  of  the  restrictions  and  permitting 
consolidations,  subject  always  to  approval,  after 
hearing,  by  the  Interstate  Commerce  Commission. 

I  believe  that  the  absorption  of  some  of  the  weak 
lines  by  the  strong  lines,  upon  fair  terms,  should  be 
promoted.  But  competition  in  service  and  facili- 
ties should  not  only  be  preserved,  but  should  be 
extended,  and  no  consolidation  should  be  per- 
mitted which  in  substantial  degree  eliminates 
such  competition. 

I  believe  that  the  existing  railroad  systems 
should  be  taken  as  a  basis,  and  such  consolidation 
as  is  desirable  should  be  built  up  on  that  basis. 
This  would  avoid  the  insuperable  financial  diffi- 
culty already  mentioned,  and  the  disorganization 
of  existing  relations,  and  the  disturbance  of  the 
billions  of  securities  already  outstanding. 


C.      The  Pooling  of  Net  Earnings 

Another  and  much  advertised  and  discussed 
method  for  solving  the  problem  presented  by  the 
existence  of  financially  strong  and  weak  lines  in  the 
same  locality  is,  in  substance,  that  the  Interstate 
Commerce  Commission  shall  divide  the  railroads 
of  the  country  into  territorial  or  traffic  groups  and 
take  the  "Property  Investment"  account  or  book 

13 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

value  of  all  the  railroads  in  each  group,  and  estab- 
lish rates  for  that  group  sufficient  to  yield  say  six 
per  cent.,  or  some  other  specified  return,  on  such 
investment  or  book  value  of  each  group. 

Undoubtedly  this  would  result  in  a  much  higher 
yield  than  the  average,  for  the  efficient  roads,  and 
much  lower  than  the  average  for  the  inefficient, 
just  as  has  always  been  the  case  in  the  past. 

But  it  is  proposed,  as  a  part  of  this  plan,  that 
the  most  efficient  roads  shall  be  limited  to  the  aver- 
age, and  their  earnings  in  excess  of  the  average 
shall  be  set  aside  for  the  benefit,  in  some  form,  of 
the  unprofitable  roads  that  earn  less. 

The  method  of  distributing  the  fund  between  the 
different  roads  varies  with  the  different  suggestions, 
but  all  contemplate  that  the  law  shall  limit  the 
earnings  of  the  prosperous  roads  and  increase  the 
earnings  of  the  poor  roads. 

The  advocates  of  the  plan  may  argue  that  they 
do  not  intend  to  take  any  value  away  from  the 
strong  roads  except  those  whose  earnings  are 
"excessive,"  but  that  the  earnings  of  the  weak 
roads  will  be  provided  by  increasing  rates  under  an 
adjustment  that  will  give  all  the  increase  to  the 
weak  roads. 

The  Proposal 
Essentially  Conflscatory 

But  many  of  the  roads  are  already  earning  in 
excess  of  six  per  cent.,  the  average  rate  suggested; 
and  obviously  the  plan  proposes  to  take  this  excess 
from  the  stockholders  of  the  roads  earning  it  for 

14 


THE    WEAKNESS    OF    CERTAIN   PROPOSED    PLANS 

the  benefit  of  the  security  holders  of  the  weaker 
roads. 

However  disguised  and  in  spite  of  all  the  refine- 
ment of  draughtsmanship  and  legal  expression,  the 
substantial  object  sought  is  to  take,  directly  or 
indirectly,  from  the  stockholders  of  the  prosperous 
roads  net  earnings  of  their  properties  and  give  the 
same  to  the  security  holders  of  the  weak  roads. 

Let  us  consider  first  who  is  to  suffer  and  who  is  to 
benefit  by  this  arrangement. 

The  stocks  of  the  prosperous  roads — that  is, 
dividend  payers — are  widely  scattered.  They 
afford  the  only  income,  and  literally  the  only  means 
of  subsistence,of  hundredsof  thousands  of  people  in 
this  country.  They  are  thus  held  because  they 
pay  dividends. 

The  poor,  who  require  a  return  from  their  sayings 
and  who  must  have  some  income,  cannot  and  gen- 
erally do  not  buy  railroad  stocks  that  have  not 
paid  dividends. 

Who  Would  Benefit 
By  This  Plan 

The  stocks  of  the  inefficient  roads  most  generally, 
I  believe,  are  held  by  small  groups,  very  often  by 
syndicates  that  accumulated  them  for  speculation, 
or  got  them  in  some  reorganization  and  are  holding 
them  with  the  hope  that  something  will  turn  up 
that  will  let  them  out  without  loss,  or  give  them  a 
speculative  profit. 

Some  of  the  schemes  that  have  been  proposed 
will  afford  this  longed  for  opportunity  to  many  a 

15 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

weary  speculator  in  inferior  railroad  securities,  but 
will  be  very  discouraging  to  the  multitude,  includ- 
ing a  great  many  women,  who  have  invested  their 
small  means  in  high-class  railroad  stocks  for  an 
income  on  which  to  live. 

Some  Constitutional 
Considerations 

But,  I  submit  that  Congress  is  without  power  to 
take  the  net  earnings  belonging  to  the  stock- 
holders of  one  railroad  company  for  the  benefit  of 
the  security  holders  of  another  railroad  company. 

It  would  be  a  denial  of  due  process  of  law,  and 
would  also  be  the  taking  of  private  property  for 
public  use  without  just  compensation,  contrary  to 
the  Fifth  Amendment  of  the  Federal  Constitution. 

A  law  that  would  take  the  net  earnings  of  one 
railroad  company  and  give  the  same  to  another  would 
be  as  obnoxious  as  would  be  a  law  declaring  that  the 
property  of  A  should  thereafter  be  the  property  of  B. 

One  person's  property  can  be  taken  by  the  Govern- 
ment for  another  person  only  by  due  proceedings  in 
each  instance,  and  just  compensation.  This  is  the 
essence  of  the  Fifth  Amendment. 

Nor  does  it  matter  how  indirect  the  taking  may  be. 
The  taking  of  income  from  the  company  earning  it  and 
putting  it  into  some  fund  to  be  thereafter  distributed 
for  the  benefit  of  others  is  as  futile  as  an  effort  to  take 
directly  from  company  A  and  give  to  company  B. 

It  may  be  argued  that  a  railroad  company  is  only 
entitled  to  a  fair  return  on  the  value  of  its  property. 

That  is  true  as  far  as  it  goes,  and  if  it  were  not  for 

16 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

the  Fifth  Amendment.  But  such  argument  begs  the 
question. 

The  Government  may  fix  rates  sufficient  to  yield  a 
fair  return  upon  the  value  of  the  property,  and  the 
company  has  no  constitutional  right  to  complain.  But 
that  is  a  very  different  proposition  from  taking  from 
the  company,  after  it  has  actually  earned  and  saved  the 
money,  a  portion  of  the  net  revenue  and  giving  it  to 
another  company. 

That  is  not  fixing  rates  which  the  carrier  may  charge 
the  shipper,  but  is  taking  the  carrier's  property  for  the 
benefit  of  another,  or  for  the  public,  if  you  please,  with- 
out due  process  of  law  and  without  just  compensation. 
They  are  two  entirely  different  acts  and  functions. 


It  is  the  right  and  duty  of  the  Government  to 
prescribe  reasonable  rates  which  the  carrier  shall 
charge  the  shipper.  The  Government  having 
fixed  the  rate,  the  carrier  may  not  constitutionally 
complain,  if  it  yields  a  fair  return  on  the  value  of 
the  property. 

The  Revenues  of  a  Carrier 
are  Its  own  Property 

But  the  revenue  which  the  carrier  gets  from  the  rate 
becomes  the  carrier's  property  and  is  as  much  pro- 
tected against  arbitrary  appropriation  as  any 
individual's  property.  It  has  then  ceased  to  be  a 
matter  of  rates,  for  the  rates  have  been  charged 
and  the  shipper  has  paid  them. 

The  Government  may  say  that  the  carrier  is 
making  too  much  money  and  may  reduce  its  rates, 
but  I  can  imagine  no  principle  upon  which  it  can 

17 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

be  claimed  that,  instead  of  reducing  the  rates,  the 
Government  may  take  the  money  from  the  carrier 
that  earns  it,  for  the  benefit  of  another  carrier,  any 
more  than  it  can  take  from  the  miscellaneous  funds 
or  assets  of  the  carrier  cash  or  property  for  the 
benefit  of  a  poorer  carrier,  in  order  to  equalize 
their  financial  condition. 

Perhaps  I  am  not  making  the  distinction  as 
clear  and  as  vital  as  it  appears  to  me. 

The  Plan  Violates  the 
Constitutional  Guaranty 

The  regulation  of  the  business  and  operations 
of  the  carriers  and  of  the  rates  they  shall  charge 
is  one  thing:  the  seizure  and  appropriation  of  the 
net  revenue  of  the  carrier,  realized  under  rates 
which  the  Government  prescribes,  is  a  very  differ- 
ent thing.  One  is  within  the  power  of  Congress 
and  the  agencies  that  it  creates;  the  other  is  the 
giving  of  one  company's  and  one  stockholder's 
property  to  another  company  and  other  stock- 
holders against  constitutional  guaranty  and  with- 
out due  process  of  law. 


But  it  may  be  argued  that  if,  as  is  conceded, 
Congress  has  power  to  make  rates  that  will  yield 
no  more  than  say  six  per  cent,  and  if  indeed  Con- 
gress may  make  different  rates  for  different  rail- 
roads (which,  however,  I  do  not  concede)  why  may 
it  not  accomplish  the  same  result  by  requiring  the 
roads  earning  in  excess  of  the  desired  rate  to  turn 

18 


THE  WEAKNESS  OF  CERTAIN  PROPOSED  PLANS 

the  excess  over  for  the  benefit  of  the  roads  earning 
less? 

Furthermore,  if  Congress  may  take  the  excess 
earnings  in  the  form  of  taxation  for  the  public 
treasury,  why  may  not  Congress  accomplish  the 
same  result  by  requiring  the  railroads  earning  in 
excess  of  the  desired  rate  to  pay  the  excess  over  for 
the  benefit  of  the  roads  earning  less? 

My  answer  is  that  we  must  deal  with  what  Con- 
gress does — not  what  it  might  do. 

We  must  test  the  constitutionality  of  a  law  by 
the  terms  of  that  law  and  not  by  the  terms  of  some 
other  law,  and  least  of  all  by  the  terms  of  a  non- 
existent law. 

We  all  know  very  well  that  Congress  will  not  if  it 
could  make  different  rates  for  different  railroads  in  the 
same  territory,  and  the  suggestion  that  it  might  do  so 
is  obviously  inadequate  as  an  answer  to  the  con- 
stitutional objection. 

We  all  know,  also,  that  even  if  Congress  has  the 
power  to  take  the  excess  earnings  of  one  railroad 
company  by  taxation  for  the  public  treasury,  it  would 
also  take  an  Act  of  Congress  to  appropriate  that  money 
again  to  make  up  the  deficit  of  the  inefficient  and 
poorer  roads. 

The  stockholders  of  the  companies  to  be  despoiled 
will  quite  naturally  prefer  to  take  their  chances  on 
Congress  making  different  rates  for  different  railroads, 
when  they  know  that  Congress  will  never  do  it,  and 
take  their  chances  on  Congress  appropriating  their 
earnings  for  the  public  treasury,  to  be  reappropriated 
by  other  Congresses  for  the  benefit  of  rival  but  un- 
prosperous  roads,  when  they  know  that  Congress  will 
do  nothing  of  the  kind. 

19 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

Those  Who  Are  Most 
Vitally  Concerned 

It  may  seem  old  fashioned  now  to  plead  the 
Constitution  against  any  action  that  is  convenient 
and  expedient,  and  especially  to  invoke  it  for  the 
protection  of  property  rights. 

But  I  venture  to  urge  its  consideration  in  this 
behalf,  not  for  the  benefit  of  any  rich  railroad  com- 
pany, but  for  the  hundreds  of  thousands  of  stock- 
holders who  look  to  dividends  upon  the  stock  of 
conservatively  managed  and  prosperous  railroads  as 
their  only  means  of  support. 

And  it  will  not  be  a  sufficient  answer  to  the 
argument  to  say  that  it  emanates  from  one  who 
happens  to  be  connected  with  a  prosperous  rail- 
road company. 

Earnings,  Not  Property  Investment, 
the  True  Basis  of  Value 

But  aside  from  the  constitutional  objection,  the 
project  is  grossly  unfair  to  the  owners  of  the 
efficient  roads  and  also  to  the  public. 

It  means  that  the  non-paying,  inefficient  roads 
shall  be  made  to  pay,  but  this  must  be  either  at 
the  expense  of  the  stockholders  of  the  good  roads, 
or  of  the  public,  or  both. 

Why  this  great  concern  for  the  unprofitable 
railroads?  Are  they  to  be  rebuilt  and  improved? 
If  so,  why? 

Have  they  traffic  to  justify  it?  Have  they  now 
more  than  they  can  handle?  Or  is  it  not  true  that 
their  trouble  is  a  lack  of  traffic? 

20 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

Or  is  the  money  to  give  value  to  stocks  that  have 
no  value  now  and  never  will  have  any  otherwise? 

Whenever  the  question  of  value  becomes  ma- 
terial in  railroad  regulation,  no  reason  is  apparent 
why  common  sense  should  not  be  allowed  sway, 
just  as  in  other  cases.  But  it  seems  not  to  be. 

An  untried  theory  is  generally  substituted  im- 
mediately— "Original  Cost,"  regardless  of  the  wis- 
dom or  folly  of  the  project  as  demonstrated  by 
experience;  "Cost  of  Reproduction  less  Deprecia- 
tion," although  exact  reproduction  is  impossible 
and  the  property  is  better  than  if  new;  "Property 
Investment  Account,"  no  matter  how  many  worth- 
less securities  may  be  carried  at  par;  and  other 
mere  theories. 

A  Railroad  is  Worth 
What  It  Will  Earn 

Now  a  railroad  is  worth  what  it  will  earn;  and  the 
average  of  its  earnings  during  a  series  of  average 
years  ought  to  be  a  fair  guide  under  the  conditions 
then  existing. 

If  this  is  not  taken,  then  there  can  be  no  hard 
and  fast  rule,  and  all  the  circumstances,  some  of 
which  were  enumerated  by  the  Supreme  Court  in 
Smyth  v.  Ames  (169  U.  S.  466)  must  be  taken  into 
account. 

A  hard  and  fast  rule  would  be  convenient,  but 
any  that  deprives  the  owner  of  the  value  of  his 
property  as  reflected  by  its  net  earnings,  is  unjust 
and  ought  not  to  be  adopted. 

But  the  earnings  of  the  property  depend  in  large 

21 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

measure  upon  the  rates  the  owner  is  allowed  to 
charge,  and  it  is  suggested  that  these  rates  in  turn 
may  be  fixed  by  the  Government;  and  that  is  true. 
Let  us  apply  this  to  the  present  situation. 

Railroad  rates  have  been  under  congressional 
regulation  since  1887.  True,  that  for  a  number  of 
years  the  regulation  was  little  more  than  nominal,  and 
there  were  rebates  and  secret  rates,  and  rate-cutting 
in  various  forms.  But  all  will  agree  that  rebates  and 
secret  rates  stopped  in  1906,  when  the  power  of 
inspection  and  detection  was  given  the  Interstate 
Commerce  Commission,  and  imprisonment  was  made 
a  part  of  the  punishment,  and  was  inflicted  upon  the 
receiver  as  well  as  the  giver  of  the  rebate.  And  the 
system  of  accounting  prescribed  by  the  Commission 
has  reflected  with  substantial  accuracy  the  financial 
condition  of  the  railroad  companies  from  the  beginning. 

So  that  since  1906,  at  least,  railroad  earnings  have 
been  open  to  the  public,  and  the  Commission  has  had 
power  since  that  year,  and  has  effectively  exercised 
the  power,  to  reduce  rates  when  found  too  high. 

Every  one  seems  to  be  estopped,  therefore,  to  claim 
that  the  railroad  rates  in  this  country,  or  in  any 
substantial  territory,  or  on  any  important  line,  have 
been  too  high. 

The  fact  is  that  they  have  been  too  low. 

Under  this  system  of  rates  railroad  values  worked 
themselves  out.  Roads  that  had  earning  capacity 
demonstrated  it,  and  those  that  had  little  earning 
capacity  also  demonstrated  that,  and  under  rates 
for  which  the  Government  was  responsible. 

Billions  of  money  has  been  lent  for  improvements 
on  the  basis  of  credit  thus  established  by  the 
various  companies. 

22 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

The  securities  of  the  good  roads  were  bought 
and  sold  at  high  levels  of  prices,  and  the  securities 
of  the  inferior  roads  were  bought  and  sold  at  lower 
levels;  and  thus  they  are  held  by  investors  to-day. 

The  prices  of  these  securities  are  the  evi- 
dence of  the  popular  judgment  of  the  relative 
value  of  these  railroads,  and  are  the  best 
evidence  of  such  value.  These  values  were 
based  upon  the  earnings  of  the  railroads  under  the 
rates  they  were  allowed  by  law  to  charge. 

As  a  matter  of  common  sense,  as  well  as  plain 
justice,  what  better  evidence  of  the  value  of  these 
railroads,  and  of  one  railroad  as  compared  with 
another,  is  possible? 

How  can  the  Government,  consistently  with  fair 
dealing,  question  the  value  of  the  railroads  as 
demonstrated  through  many  years  by  rates  estab- 
lished by  or  under  the  regulation  of  its  own 
agencies? 

New  money  has  been  put  into  the  properties  by 
investors  for  additions,  betterments  and  equipment, 
thus  increasing  transportation  facilities,  which  it 
would  be  the  duty  of  the  Government  itself  to  provide 
if  not  furnished  by  private  capital;  and  much  of  this 
capital  has  been  too  recently  invested  to  have  been 
reflected  in  increased  earnings. 

The  wages  of  labor,  the  cost  of  material,  and  other 
operating  expenses  and  taxes  have  grown  enormously, 
while  rates  have  declined  (with  the  exception  of  the 
recent  wartime  increases),  so  that  the  purchasing 
power  of  the  legally  fixed  transportation  rate  has 
fallen,  and  is,  generally  speaking,  not  half  what  it 
formerly  was. 

23 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

It  is  upon  such  considerations  as  these,  and  the 
values  established  under  earnings  from  rates 
prescribed  or  sanctioned  by  law  for  years,  that 
rates  must  be  based,  and  not  upon  book  value, 
reproduction  cost,  or  any  other  mere  theory.  It 
is  the  practical  situation  and  existing  status  that 
should  be  dealt  with. 

Why  venture  into  new  fields  for  rate-making 
and  seek  to  disturb  and  unsettle  not  merely  the 
value  of  the  securities  involved,  but  the  business 
and  commerce  of  the  country,  which  have  become 
adjusted  to  and  in  fact  made,  the  present  system 
of  rates? 

Why  not  continue  the  present  adjustment  of 
rates,  and  make  such  increases  as  necessary  to 
meet  the  increased  cost  of  recent  years  and  provide 
a  return  on  the  new  capital  that  has  been  put  into 
properties  in  such  enormous  amounts,  and  which 
must  be  provided  for  the  future,  leaving  the  Inter- 
state Commerce  Commission  free  to  reconsider 
and  review  rates  from  time  to  time,  so  as  to  adjust 
the  revenue  to  the  changing  expense  of  operation, 
the  rise  and  fall  of  wages  and  prices,  and  the 
expenditure  of  new  capital? 


D.      A  Guaranty  by  the  Government 

Many  financiers  and  railroad  men  believe  that 
a  guaranty  of  dividends  or  some  definite  return  on 
the  money  invested  in  railroads  is  necessary  in 
order  to  re-establish  faith  in  the  railroad  securities 
now  constituting  such  an  important  part  of  our 

24 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

financial  structure,  and  induce  the  investment  of 
the  additional  capital  necessary  to  provide  the 
railroad  facilities  which  are  required. 

This  leads  to  the  consideration  of  the  question  of 
a  guaranty  by  the  Government. 

Undoubtedly  the  guaranty  by  the  Government 
of  a  reasonable  return  upon  the  full  value  of  rail- 
road property  would  be  satisfactory  to  those  who 
consider  the  problem  only  from  the  standpoint  of 
the  investor. 

But  that  is  impracticable,  because  it  is  not  be- 
lieved that  the  Government,  as  a  permanent 
policy,  would  guarantee  the  railroad  owners  a  fair 
return  upon  the  full  value  of  their  property  and 
leave  the  management  in  their  hands,  taking  all  of 
the  risk  and  none  of  the  profits:  whereas,  if  the 
Government  should  take  the  excess  above  the 
guaranty,  then  it  would  cease  to  be  a  guaranty,  and 
all  incentive  to  competition  and  economy  by  the 
private  management  would  be  eliminated.  I 
fancy  that  the  people  would  prefer  to  come 
directly  to  Government  ownership,  unpopular 
though  it  is. 

It  has  been  urged,  however,  that  a  small  return 
— something  less  than  the  full  value — should  be 
guaranteed  in  order  to  furnish  the  company 
financial  credit,  while  still  leaving  the  incentive  to 
competition  and  economy.  I  am  afraid  that  plan 
would  not  accomplish  the  object. 

The  guaranty  of  a  return  of  two  or  three  or  four 
per  cent  upon  the  value  of  a  railroad  might  be 
comforting  to  the  first  mortgage  bondholders,  or 

25 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

the  holders  of  other  bonds  now  outstanding, 
who  would  have  the  first  claim  upon  the  fund. 
But  how  would  it  help  the  corporation  to  raise 
more  money,  which  is  the  object  desired? 

Of  what  benefit  would  a  Government  guaranty  of 
two  or  three  or  even  four  per  cent  upon  the  value  of 
the  Pennsylvania  Railroad,  or  the  New  York  Central 
Railroad,  or  the  Baltimore  and  Ohio  Railroad,  or  the 
Rock  Island  Railroad,  or  moct  other  railroads,  be  to 
those  companies? 

How  would  it  assist  them  in  raising  money,  since 
the  guaranty  would  not  be  sufficient  to  pay  the  interest 
on  bonds  already  outstanding  and  secured  by  prior 
liens? 

It  would  make  doubly  secure  what  is  already  abund- 
antly secured.  But  it  would  afford  no  collateral  for 
new  issues  nor  secure  new  loans.  On  the  contrary,  I 
believe  it  would  be  distinctly  detrimental  to  the  com- 
pany in  securing  new  money,  because  of  the  inevitable 
tendency  that  such  guaranty  would  have  to  prompt 
Government  officials  to  interfere  and  endeavor  to 
shape  the  policy  of  the  company  to  extreme  con- 
servatism, in  order  to  guard  against  the  possibility  of 
the  Government  being  called  upon  to  meet  the 
guaranty. 

Moreover,  as  time  passed,  the  public  would  be  more 
and  more  inclined  to  regard  the  amount  of  the  guaranty 
as  the  measure  of  the  return  to  which  the  railroad 
company  was  entitled,  and  in  every  rate  hearing  the 
Government  guaranty  would  be  dwelt  upon  by  those 
opposing  increases  or  seeking  reductions  in  rates  as  the 
Government's  judgment  of  what  the  company  was 
entitled  to  earn. 

The  importance  of  re-establishing  railroad  credit 
cannot  be  overestimated;  but,  nevertheless,  I  am 

26 


THE    WEAKNESS    OF    CERTAIN    PROPOSED    PLANS 

persuaded  that  no  guaranty  short  of  a  return  upon 
the  full  value  of  railroad  property  will  be  helpful  to 
that  end,  and  that  a  guaranty  of  full  value  is  not 
practicable  without  Government  operation;  and, 
as  indicated  at  the  outset,  I  regard  that  as  beyond 
present  discussion. 


27 


COMMENTS     ON     THE     RAILROAD     PROBLEM 


II 

The  Sound  Remedy 

The  plan  devised  by  the  committee  of  railroad 
executives  and  submitted  through  its  chairman, 
Mr.  T.  De  Witt  Cuyler,  to  the  Senate  Committee 
on  Interstate  and  Foreign  Commerce  offers,  in  my 
judgment,  the  best  solution  of  the  problem.  Its 
principal  features  are: 

(A)  The  rule  of  rate-making  to  be  provided  by 
Congress  itself,  which  should  require  that  the  rates  be 
sufficient  to  enable  the  carriers  to  provide  the  requisite 
service  and  facilities,  protect  existing  investments,  and 
provide  the  new  capital  necessary  in  the  public  interest. 

(B)  Compulsory  federal  incorporation  of  all  rail- 
road carriers. 

(C)  Exclusive     federal     regulation     of     railroad 
securities. 

(D)  Exclusive  federal  regulation  of  railroad  rates. 

(E)  Creation  of  a  Department  of  Transportation 
with  power  to  act  quickly  and  deal  with  emergencies, 
and  the  distribution  of  the  regulatory  powers  between 
such  Department  and  the  Interstate  Commerce  Com- 
mission, with  the  creation  of  such  regional  or  other 
subordinate  commissions  and  agencies  as  may  be 
necessary. 

(F)  Modification    of    restrictions    upon   railroad 
consolidations,  and  provision  for  the  merging  of  lines 
when  in  the  public   interest  and   approval   by   the 
Commission. 

28 


THE     SOUND     REMEDY 


.4.      That  Congress  Establish  a  Rule  of 
Rate-Making 

Without  Government  ownership  or  operation, 
the  only  reliance  for  railroad  revenue  to  support 
railroad  credit  must  be  upon  the  adoption  by 
Congress  of  a  sound  railroad  policy  involving  abso- 
lute justice  to  railroad  capital,  and  requiring 
specifically  and  plainly  that  the  rates  to  be  fixed 
shall  be  sufficient  to  enable  the  carriers  to  provide 
safe  and  adequate  service,  to  protect  existing  values,  and 
to  attract  the  new  capital  necessary  in  the  public 
interest. 

To  that  end  Congress  should,  among  other  things, 
specifically  provide  that  the  level  of  rates  must 
properly  reflect  the  cost  of  wages,  materials  and  all 
other  expenses  incident  to  maintenance  and  opera- 
tion, and  a  reasonable  return  upon  the  new  capital 
invested. 

It  is  for  Congress  to  say  whether  the  railroads 
of  the  nation  shall  be  publicly  or  privately  owned, 
and  whether  they  shall  be  prosperous  and  efficient 
or  poor  and  inefficient,  for  Congress  has  the  law- 
making,  which  includes  the  rate-making  power. 

True,  Congress  cannot  make  a  confiscatory  rate. 
That  would  be  unconstitutional,  and  a  judicial 
question  would  arise. 

The  Only  Limitations 
of  a  "Reasonable  Rate" 

The  rates  which  Congress  makes — directly  or 
indirectly  through  a  commission  or  other  agency — 

29 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

must  be  "reasonable."  I  anticipate  the  usual 
sneering  question:  "What  is  a  reasonable  rate?" 
It  is  whatever  rate  Congress  may  fix,  provided 
it  is  not  so  low  as  to  be  confiscatory  of  the  carrier's 
property,  nor  so  high  as  to  confiscate  the  shipper's 
property  by  preventing  it  from  moving.  Between 
those  limits  any  rate  the  Government  fixes  is 
"reasonable"  in  a  legal  sense. 

There  is  a  wide  field  for  the  exercise  of  discretion  by 
the  rate-making  power  in  fixing  a  reasonable  rate. 

A  reasonable  rate  for  a  given  service,  for  instance, 
may  be  25  cents,  or  30  cents,  or  40  cents,  or  50  cents. 
That  is  to  say,  a  rate  of  50  cents  for  that  service  may 
allow  the  traffic  to  move  freely,  and  leave  a  large 
profit  to  the  shipper,  as  well  as  a  large  return  to  the 
carrier,  while  a  rate  of  25  cents  might  still  be  above 
confiscation  of  the  carrier's  property  and  leave  some 
profit  to  the  carrier. 

Now  any  rate  between  25  cents,  which  still  leaves  the 
carrier  some  profit,  and  50  cents,  which  the  shipper 
can  afford  to  pay,  is,  upon  the  facts  assumed,  a 
"reasonable"  rate;  and  it  is  for  the  Government  to  say 
whether  the  rate  shall  be  25  cents  or  50  cents,  or  some 
amount  between  those  figures,  according  to  its  policy. 

The  policy  of  the  Government  may  be  to  allow  the 
railroads  nothing  above  maintenance  and  a  bare  living 
for  the  capital  invested,  in  which  case  the  rate  might 
be  fixed  at  25  cents ;  or  its  policy  may  be  to  encourage 
additions,  betterments,  extensions,  the  purchase  of 
new  equipment,  improved  facilities,  better  service, 
and,  generally,  the  upbuilding  of  its  transportation 
system,  in  which  case  the  rate  might  be  fixed  at  40 
cents,  or  50  cents. 

30 


THE     SOUND     REMEDY 


Congress  Itself  Should  Declare 
A  National  Railroad  Policy 

This  is  of  course  a  very  simple  illustration;  but 
my  point  is  that  the  time  has  arrived  for  Congress 
itself  to  declare  by  law  a  national  railroad  policy, 
and  not  leave  it  to  the  Interstate  Commerce  Com- 
missioners or  other  subordinate  officers  or  agencies 
to  say  whether  the  policy  of  the  National  Govern- 
ment is  to  impoverish  the  railroads  to  please 
certain  shippers,  or  to  improve  and  extend  railroad 
facilities  for  the  country  by  making  compensatory 
rates,  or  to  pursue  one  policy  at  one  season  and 
the  other  policy  at  another. 

Congress  should  itself  provide  the  rule  of  rate- 
making  and  require  the  Commission  or  other  rate- 
making  agency  to  take  into  account  the  increase  in 
taxation,  in  rates  of  wages,  in  cost  of  materials 
and  other  operating  costs,  and  the  new  capital 
invested  in  the  property,  as  well  as  the  value  of  the 
property  as  previously  demonstrated. 

Our  railroad  transportation  system,  which  is 
essentially  national,  should  be  rescued  from  the 
irresponsible  and  conflicting  state  agencies,  and 
brought  under  uniform  control  and  regulation  in 
the  national  interest,  except  as  to  strictly  local 
matters. 

The  national  agencies  necessary  for  the  adminis- 
tration and  supervision  of  the  railroads  should  be 
created. 

It  is  not  enough  to  create  them  with  authority  to 
act,  but  they  must  be  sufficient  in  number  and 
character  to  act,  for  it  is  worse  than  idle  to  confer 

31 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

jurisdiction  and  authority,  as  upon  the  Interstate 
Commerce  Commission,  to  perform  a  task  which 
in  magnitude  is  utterly  beyond  its  power  to 
perform. 

Necessary  to  Provide  for 
Sufficiency  of  Facilities 

Among  the  agencies  that  should  be  created  is  one 
responsible  for  the  sufficiency  of  the  transportation 
facilities  required  by  the  people. 

Since  the  creation  of  the  Interstate  Commerce 
Commission,  the  only  concern  of  the  Government, 
as  reflected  by  legislation  and  commission  action, 
has  been  to  keep  down  the  revenues,  prevent  dis- 
crimination, and  generally  chastise  railroad  man- 
agement. 

No  sense  of  responsibility  for  providing  the 
requisite  railroad  facilities  has  been  manifested  on 
behalf  of  the  Government. 

That  task  has  been  left  to  private  enterprise, 
handicapped  by  the  governmental  policy  of  sus- 
picion and  repression. 

But  it  is  now  abundantly  evident  that  this 
policy  will  not  provide  the  transportation  which  is 
essential  for  the  country;  that  the  Government 
must  either  take  over  the  railroads  and  provide  the 
facilities  out  of  the  public  treasury,  or  leave  them 
in  private  ownership  under  government  super- 
vision of  a  kind  and  character  that  will  assure  fair 
dealing  and  attract  the  necessary  capital. 

32 


THE     SOUND     REMEDY 


The  Interstate  Commerce  Commission  utterly 
failed  to  see  and  meet  by  rates  the  demand  for  in- 
creased transportation  which  was  constantly  growing 
until  the  collapse  came. 

Unless  this  disastrous  mistake  is  to  be  repeated,  and 
if  the  requisite  private  capital  is  to  be  found,  it  will  be 
necessary  for  Congress  to  create  some  Department  or 
Board  or  Agency  whose  duty  it  shall  be,  as  a  part  of 
the  executive  machinery  of  the  Government,  to  study 
and  keep  informed  respecting  the  transportation  facil- 
ities as  they  are,  the  need  for  more  transportation  and 
better  service,  where  the  need  is,  when  it  is  likely  to 
increase,  what  the  necessary  facilities  will  cost,  the 
ability  of  the  carriers  to  provide  them,  the  reason  why 
they  are  not  provided,  if  lacking,  and  if  more  revenue 
is  needed,  then  how  much;  and  certify  the  facts  to  the 
Interstate  Commerce  Commission  as  the  basis  for  its 
action  in  revising  the  rates  to  provide  the  additional 
revenue,  if  needed. 

In  other  words,  an  agency  of  the  Government 
charged  with  the  responsibility,  on  behalf  of  the 
Government,  of  seeing  that  the  transportation  needed 
by  the  country  is  provided,  and  deciding  for  the 
Government  the  money  that  is  required,  leaving  the 
Interstate  Commerce  Commission  to  adjust  the  rates 
necessary  for  that  purpose,  and  to  deal  with  all  other 
rate  questions,  controversies,  complaints,  etc.,  for 
which,  and  only  for  which,  it  is  equipped. 

Hopeless  to  Place  the  Responsibility  Upon 
the  Interstate  Commerce  Commission 

It  is  hopeless  to  put  upon  the  Interstate  Com- 
merce Commission  the  responsibility  resting  upon 
the  Government  to  see  that  the  railroad  transpor- 
tation facilities  essential  to  the  welfare  of  the 

33 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

country  are  provided  when  and  as  needed,  and  at 
the  same  time  regulate  all  the  railroad  rates  and 
hear  and  determine  all  the  complaints. 

They  are  entirely  separate  and  distinct  functions : 
one  is  the  executive  function  of  looking  after  the 
transportation  service,  its  character  and  sufficiency, 
and  deciding  what  is  needed,  and  what  amount  is 
necessary  to  provide  it;  the  other  is  the  legislative 
function  of  fixing  the  rates  and  the  semi- judicial 
function  of  determining  rate  controversies. 

The  Interstate  Commerce  Commission  is  not 
equipped  for  the  former,  and  has  shown  its  lack 
of  appreciation  of  the  necessity  for  and  the  means 
of  providing  and  assuring  more  transportation 
facilities. 

It  is  not  sufficient,  therefore,  to  relegate  railroad 
capital  only  to  the  agency  that  has  failed  so  sig- 
nally in  the  past.  But  it  will  be  necessary,  if  private 
management  is  to  succeed,  for  the  Government  to 
perform  the  governmental  duty  of  seeing  that  the 
requisite  transportation  facilities  and  service  are 
provided,  and  to  that  end  create  an  agency  to  de- 
termine the  necessity  and  the  cost,  and  to  advise 
the  measures  necessary  to  provide  the  capital 
which  the  Government  itself  does  not  propose  to 
furnish. 

Railroad  Capital  Will  Not  Take  All  the  Risk 
Without  Hope  of  Profit 

If  Congress  will  enact  the  necessary  laws  giving 
railroad  capital  a  business  chance,  I  believe  that 
capital  will  take  a  business  risk,  and  the  money 

34 


THE     SOUND     REMEDY 


required  to  provide  the  requisite  railroad  facilities 
for  the  future  will  be  forthcoming. 

But  railroad  investors  and  owners  will  not  take 
all  the  risks  and  forego  the  profits  of  the  business. 

Why  should  they?  There  are  too  many  other 
opportunities  for  profitable  investment  all  over 
the  world,  and  more  now  and  for  many  years  to 
come  than  ever  before. 

If,  as  many  propose,  the  return  upon  railroad 
capital  is  to  be  limited  at  best  to  a  low  fixed  return, 
even  by  the  most  successful  and  best  managed 
roads,  with  no  hope  of  anything  more  for  good 
management,  inherent  earning  capacity  and  other 
considerations  ordinarily  influencing  values,  while 
all  misfortunes  are  to  be  borne  by  the  investors, 
the  necessary  capital  will  not  be  obtained. 

The  hope  of  profit  should  not  be  foreclosed.  If 
it  is  the  policy  of  the  Government  to  limit  the  return 
at  best  to  six  per  cent  or  some  other  low  fixed  rate, 
then  that  return  will  have  to  be  guaranteed  to 
attract  the  investor.  Only  the  prospect  of  profit 
justifies  risk  in  financial  affairs. 

No  Reason  Why  Profit  Should  Be  Denied 
A  Railroad  Stockholder 

Under  rates  prescribed  by  the  Government,  or 
with  its  approval,  and  applying  to  all  alike,  why 
should  profit  be  denied  a  stockholder  of  the  wisely 
built,  well  managed  railroad  any  more  than  to  the 
owners  of  bank  stock,  or  steel  stock,  or  brewery 
stock,  or  any  other  stock? 

35 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

But  it  is  said  that  the  latter  are  engaged  in  pri- 
vate business. 

Very  well.  Who  is  more  deserving  of  encourage- 
ment, liberal  treatment  and  appreciation — he 
whose  money  provides  the  railroad  facilities  which 
the  public  convenience  and  interest  require  and 
conducts  his  business  so  well  that  he  can  make  a 
profit  out  of  it  at  rates  which  the  Government 
itself  fixes;  or  the  man  in  private  business  (in 
some  lines,  the  more  private  the  better  for  it)  with 
no  public  interest  involved,  and  only  his  own  sel- 
fish interest  to  serve? 

It  is  about  time  that  we  were  introducing  com- 
mon sense  into  some  of  our  theories  about  railroad 
capital. 

No  money  except  that  devoted  purely  to  benev- 
olence is  employed  more  in  the  public  interest  or  is 
entitled  to  more  encouragement  or  fairer  treatment 
and  consideration  than  that  which  is  invested  in 
the  development  and  upbuilding  of  our  railroad 
facilities. 

It  is  "affected  with  a  public  interest"  in  more 
senses  than  that  which  subjects  it  to  reasonable 
regulation  by  the  Government,  though  too  often 
these  are  overlooked. 

It  serves  the  public;  it  provides  transportation 
facilities  and  conveniences  for  the  public;  and 
promotes  the  public  interest  in  vital  ways. 

If  by  good  management  it  can  be  made  produc- 
tive to  its  owner  in  competition  with  others,  in  the 
character  of  service  and  facilities  supplied  at  rates 
fixed  by  the  Government,  there  is  no  reason  in 


THE     SOUND     REMEDY 


morals,  and  there  should  be  none  in  law,  why  the 
owner  should  not  be  as  much  entitled  to  enjoy  the 
profit  as  the  owner  of  money  invested  in  private, 
and  often  much  less  worthy,  enterprises. 

The  Choice  Before 
The  Nation 

I  believe  firmly  that  the  choice  of  this  country  with 
respect  to  its  railroad  transportation  ultimately  is 
between 

(1)  Inadequate  and  impoverished  railroad  trans- 
portation facilities,  or 

(2)  Government  ownership  of  the  railroads,  or 

(3)  A  guaranty  by  the  Government  of  a  reasonable 
return  upon  railroad  capital,  or 

(4)  Rates  that  will  be  reasonable  under  all  the 
circumstances  determined  by  a  Government  agency 
that  will  consider  the  needs  of  the  traffic  and  the 
needs  of  the  carrier,  with  the  right  to  each  carrier  to 
keep  whatever  profit  it  can  make  out  of  such  rates  so 
established,    by    good    management,    good    service, 
economy,  wise  investment,  and  success  in  competing 
for  business. 


#.       Compulsory  Federal  Incorporation 

But  it  is  not  merely  a  just  rule  of  rate-making 
enjoined  upon  the  commission  by  law,  but  relief 
from  the  disabilities  imposed  by  conflicting  and 
impracticable  state  regulation,  and  a  comprehen- 

37 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

sive  and  unified  system  of  national  regulation  that 
are  necessary  to  re-establish  the  credit  of  the  rail- 
roads and  provide  the  facilities  that  the  country 
needs;  and  it  is  the  plan,  as  a  whole,  recommended 
by  the  Committee  of  Railroad  Executives,  which 
is  urged. 

Among  the  most  important  of  the  needs  of  the 
situation  is  the  compulsory  federal  incorporation 
of  railroad  carriers. 

So  long  as  Congress  confined  itself  to  restrictive 
legislation  of  railroads  as  common  carriers,  it  was 
not  material  whether  they  were  federal  or  state 
corporations,  or  indeed  corporations  at  all. 

The  working  and  operation  of  the  physical 
properties  and  their  relations  as  carriers  to  the 
public  were  the  only  matters  of  concern,  and  their 
corporate  functions  were  not  substantially  affected. 

If  only  restrictive  and  oppressive  legislation  were 
intended  now,  federal  incorporation  would  not  be 
necessary. 

But  the  time  seems  to  have  arrived  for  a  com- 
prehensive legislative  plan  for  developing  and 
sustaining  necessary  railroad  transportation,  or, 
in  other  words,  for  constructive  legislation. 

All  Constructive  Legislation  Must 
Primarily  Assure  Railroad  Credit 

The  very  first  feature  of  the  problem  is  the 
credit  of  the  railroads — the  means  by  which  this 
is  to  be  established  and  maintained  in  order  that 
the  requisite  capital  may  be  secured. 

38 


THE     SOUND     REMEDY 


This  involves  at  once  the  most  important 
corporate  function;  the  power  to  raise  money  and 
issue  stock  and  bonds. 

Hitherto  Congress  has  left  that  power  exclusively 
with  the  states,  no  two  of  which  have  the  same  laws 
or  regulate  the  subject  in  the  same  way. 

They  have,  however,  within  the  last  ten  years, 
enormously  multiplied  their  laws  upon  the  subject — 
all  of  them  restrictive — until,  generally  speaking,  it  is 
not  too  much  to  say  that  railroad  systems  which 
traverse  several  states  are  tied  hand  and  foot  when  it 
comes  to  the  issue  and  sale  of  stock  and  bonds,  and 
too  often  they  are  thrown  back  upon  short  term 
borrowing,  with  dangerous  and  often  unfortunate 
consequences. 

The  power  to  borrow  money  and  the  power  to 
issue  and  sell  stock  and  bonds  are,  of  course, 
corporate  powers. 

It  is  elementary  law  that  a  corporation  derives 
its  corporate  powers  from  the  government  that 
creates  it  and  can  exercise  none  not  conferred — 
especially  none  prohibited — by  that  government. 

May  Congress  authorize  a  state  railroad  cor- 
poration engaged  in  interstate  commerce  to  borrow 
money  and  issue  securities  in  excess  of  the  amount 
or  in  a  different  manner  from  that  authorized  by 
the  state  that  created  it? 

I  believe  that  by  a  carefully  worded  statute  it 
can.  Then  is  it  necessary  to  federalize  all  state 
railroad  corporations  in  order  to  enable  Congress 
to  regulate  their  financial  operations  and  the  issue 
and  sale  of  securities  by  them? 

39 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

That  in  my  opinion  will  depend  very  much  on 
the  action  of  the  several  states. 

Railroad  Corporations  Now 
Dependent  Upon  Individual  States 

The  corporations  now  are  the  creatures  of  the 
states  incorporating  them.  The  states  gave  them 
their  lives  and  conferred  all  their  powers,  and  the 
states  may  take  away  their  lives  and  abolish  their 
powers  so  long  as  they  are  permitted  to  remain  as 
mere  creatures  of  the  states. 


Let  me  illustrate  my  meaning:  Take  for  illustration 
some  well-known  railroad — one  near  us — say  the 
Baltimore  &  Ohio.  That  company,  I  believe,  is  a 
corporation  of  the  State  of  Maryland.  It  can  exercise 
only  such  powers  as  the  State  of  Maryland  confers 
upon  it.  It  can  exercise  even  these  in  some  other 
state  only  by  consent  of  such  state.  But  it  cannot 
exercise  in  any  other  state,  any  more  than  in  Maryland, 
powers  denied  to  it  by  Maryland,  the  state  of  its 
creation.  Ordinarily  a  state  specifies  the  maximum 
amount  of  capital  stock  a  corporation  may  issue  and 
prescribes  how  it  shall  be  issued  and  disposed  of,  and 
regulates  in  detail  its  corporate  functions,  particularly 
in  the  matter  of  capitalization. 

Let  us  suppose  that  Congress,  in  regulating  the 
finances  of  the  railroads  of  the  United  States,  pre- 
scribes corporate  procedure  entirely  different  from  and 
in  direct  conflict  with  that  prescribed  for  the  Baltimore 
&  Ohio  by  the  State  of  Maryland. 

Suppose  the  laws  of  the  State  of  Maryland  expressly 
deny  its  creature,  the  Baltimore  &  Ohio,  the  necessary 
power  to  do  the  financing  provided  for  by  the  laws  of 
Congress. 

40 


THE     SOUND     REMEDY 


May  the  Baltimore  &  Ohio  proceed  to  do  things 
prohibited  by  the  laws  of  the  state  that  created  it  and 
exercise  powers  denied  by  that  state? 

Many  states  have  reserved  the  power  to  repeal 
railroad  and  other  charters  granted  under  their 
laws.  Suppose  the  state  repeals  the  charter  of  the 
railroad  company? 

It  would  not  even  be  necessary  for  the  state  to 
give  a  reason  for  its  repeal.  The  corporation  would 
be  at  an  end.  There  would  be  no  congressional  act 
for  incorporation  to  which  the  railroad  could  turn. 

Practical  Problems  Involved  in  National 
Regulation  of  Securities  of  State  Corporations 

How  would  the  government  meet  such  a  situa- 
tion and  carry  out  the  national  policy  by  utilizing 
the  existing  state  corporations? 

I  assume  that  Congress  would  not  undertake  to 
compel  the  corporations  to  issue  and  sell  stock  or 
bonds. 

The  most  it  could  do  would  be  to  give  them  the 
right  to  issue  and  sell  such  securities,  a  right 
which  the  state  could  by  coercion  prevent  the  cor- 
poration from  exercising,  just  as  in  so  many  in- 
stances the  states  have  coerced  railroad  companies 
into  making  interstate  rates  in  accordance  with 
the  wishes  of  state  commissions. 

Congress  would  not,  I  assume,  seek  by  law  to 
compel  federal  corporations  to  issue  securities,  but 
being  federal  corporations  they  would  be  pro- 
tected against  coercion  of  the  state  authorities. 

This  is  no  mere  imaginary  danger.    A  bill  was 

41 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

introduced  (but  I  do  not  know  whether  it  was 
enacted)  in  one  of  the  state  legislatures,  providing 
for  the  forfeiture  of  the  charter  of  any  railroad 
corporation  of  that  state  that  obeyed  orders  of  the 
Interstate  Commerce  Commission  in  conflict  with 
orders  of  the  state  railroad  commission;  and  there 
are  scores  and  even  hundreds  of  instances  where 
state  commissions  have  coerced  railroad  companies 
into  making  interstate  rates  in  accordance  with 
the  wishes  of  the  state  commissions. 

Difficulties  Involved  in  Leases 
and  Consolidations 

What  is  true  with  respect  to  the  issue  of  securi- 
ties is  equally  applicable  to  the  consolidation, 
lease,  sale  or  other  combination  of  railroads. 

The  power  is  a  corporate  power,  and  no  corporation 
can  consolidate  with  another  or  sell  or  lease  or  other- 
wise dispose  of  its  railroad  or  any  part  thereof  unless 
expressly  authorized  by  the  laws  of  the  state  that 
created  it. 

Violation  of  this  restraint  subjects  it  to  forfeiture  of 
its  charter,  if  not  other  penalties.  This,  too,  is 
elementary  law. 

Now  it  seems  to  be  generally  recognized  that  the 
legislation  under  consideration  should  provide  for  the 
merging  in  some  manner  of  some  of  the  lines  through 
consolidations,  sales,  leases  or  otherwise,  where  by  so 
doing  the  public  interest  will  be  promoted,  and  subject 
to  the  previous  approval  of  the  Interstate  Commerce 
Commission. 

It  is  obvious,  I  submit,  that  none  of  these  objects 
can  be  accomplished  to  a  considerable  extent  without 
infinite  difficulty  and  delay,  if  the  ownership  of  the 

42 


THE     SOUND     REMEDY 


railroads  of  the  country  is  left  in  the  meantime  in 
corporations  created  by  the  several  states,  many  of 
which  have  statutes,  and  even  constitutions,  that 
expressly  prohibit  the  very  thing  that  it  now  seems 
Congress  may  desire  to  accomplish. 

All  Railroad  Corporations  Should  Be  Subject  to 
Financial  Regulation  by  the  Nation 

Then  is  it  not  necessary  in  a  nation-wide  trans- 
portation system,  and  is  it  not  obviously  in  the 
interest  of  all  concerned — the  investor,  the  shipper 
and  the  citizen  generally — that  all  railroad  cor- 
porations throughout  the  United  States  should 
have  the  same  corporate  powers  and  restrictions 
with  respect  to  their  financial  powers,  and  the 
same  duties  and  obligations  to  the  public,  so  that 
every  investor  will  know  precisely  what  every 
railroad  corporation  may  and  may  not  lawfully 
do  in  issuing  and  selling  securities,  and  that  every 
shipper  and  traveler  may  know  the  duty  and  obli- 
gation of  every  railroad  company  to  him,  whether 
in  Maine  or  California,  in  Michigan  or  Texas? 

So  long  as  state  railroad  corporations  exist,  every 
issue  of  stock  or  bonds  or  other  securities  must  be  ex- 
amined, and  the  legality  and  regularity  of  all  corporate 
and  other  proceedings  under  the  charter  of  the  com- 
pany and  the  laws  of  the  state  creating  it,  and  of  the 
several  states  in  which  the  railroad  lines  are  located, 
must  be  tested  and  supported  by  the  opinion  of  counsel. 
Federal  incorporation  would  do  away  with  this  delay 
and  expense,  which  of  itself  would  be  a  great  gain. 

I  have  no  doubt  that  Congress  has  power  to  provide 
by  general  law  for  the  incorporation  of  all  railroad 
companies  engaging  in  interstate  commerce,  and  to 

43 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

require  all  existing  companies  to  reincorporate  under 
such  law. 

I  will  cite,  without  taking  space  to  analyze,  the  decisions  of  the 
Supreme  Court  which  lay  down  principles  that  make  this  clear: 
California  v.  Central  Pacific  Railroad  (127  U.  S.,  1,  39);  Pacific 
Railroad  Removal  Cases  (115  U.  S.  1,  18);  McCulloch  v.  Maryland 
(4  Wheat,  316) ;  HoustonEast  &  West  Texas  Railway  v.  United  States 
(234  U.  S.,  342);  Reagan  v.  Mercantile  Trust  Co.  (164  U.  S..  413, 
414,  416);  Smyth  v.  Ames  (169  U.  S.,  466,  519);  Minnesota  Rate 
Case  (230  U.  S.,  352,  425);  Thompson  v.  Union  Pacific  Railroad 
Co,  (9  Wall,  579);  Interstate  Commerce  Commission  v.  Goodrich 
Transit  Co.  (224  U.  S.,  194);  Southern  Ry.  v.  United  States  (222 
U.  S.,  20);  American  Express  Co.  v.  Caldwell  (244  U.  S.,  617);  and 
Illinois  Central  R.  R.  Co.  v.  Public  Utilities  Commission  (245 
U.  S.,  493). 

Congress  Has  Ample  Power  Under  Both 
Commerce  and  War-Making  Powers 

Congress  is  vested  by  the  Constitution  with 
power  to  regulate  interstate  and  foreign  commerce, 
to  establish  post  roads,  and  to  make  war  and  pro- 
vide for  the  national  defense. 

In  exercising  these  and  other  express  powers, 
Congress  is  authorized  by  the  last  clause  of  section 
8,  Article  I  of  the  Constitution,  "To  make  all 
laws  which  shall  be  necessary  and  proper  for  carry- 
ing into  execution  the  foregoing  powers  and  all 
other  powers  vested  by  this  Constitution  in  the 
Government  of  the  United  States,  or  in  any  de- 
partment or  officer  thereof;"  and  the  Constitution 
and  the  laws  and  treaties  made  in  pursuance 
thereof  are  the  "supreme  law  of  the  land." 

It  is  easily  demonstrable  that  the  wise  and  effec- 
tive regulation  of  interstate  railroad  rates  requires 
the  like  regulation  of  intrastate  railroad  rates. 

It  is  familiar  constitutional  law  that  any  power 
which  it  is  necessary  for  Congress  to  exercise  in 

44 


THE     SOUND     REMEDY 


carrying  out  and  executing  the  powers  expressly 
conferred  upon  it,  is  to  be  implied  from  the  last 
clause  of  section  8,  Article  I ;  and  thus  follows  the 
power  to  regulate  intrastate  rates  whenever  it  is 
necessary  to  the  effective  regulation  of  interstate 
rates. 

Congress  may  go  as  far  as  it  likes  in  the  regula- 
tion of  the  corporations  created  by  it  and  of  the 
railroads  owned  by  them. 

It  may  withdraw  them  entirely  from  regulation 
by  the  states,  or  it  may  permit  regulation  to  such 
extent  as  it  may  prescribe.  It  is,  of  course,  for 
Congress  to  say  how  far  it  will  go. 

We  need  not  be  concerned  about  any  legal  theories 
as  to  whether  the  reincorporation  under  an  act  of 
Congress  of  an  existing  state  railroad  company  works 
a  dissolution  of  the  corporation.  That  is  merely  deal- 
ing with  legal  fictions. 

The  luminous  opinion  of  Justice  Bradley  in  Cali- 
fornia v.  Central  Pacific  Railroad  Co.  (127  U.  S.,  1,  39) 
ought  to  be  sufficient  on  that  point.  Nor  do  I  care 
much  about  the  theories  as  to  the  rights  of  stock- 
holders to  object  to  fundamental  corporate  changes. 

It  is  enough  that  every  railroad  was  built  and  en- 
gaged in  interstate  commerce — and  every  stockholder 
has  enjoyed  the  benefits — with  full  knowledge  of  the 
power  of  Congress  whenever  it  chose,  to  regulate  that 
commerce  and  every  instrumentality  of  it. 

Congress  has  regulated  the  corporation  already  in 
various  ways,  including  its  book-keeping  with  respect 
to  strictly  intrastate  as  well  as  interstate  transactions 
(Interstate  Commerce  Commission  v.  Goodrich  Transit 
Co.,  224  U.  S.,  194);  the  character  and  equipment  of 
its  cars,  even  those  not  engaged  in  interstate  com- 

45 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

merce  (Southern  Railway  Co.  v.  United  States,  222 
U.  S.,  20) ;  and  the  manner  in  which  it  shall  treat,  in  its 
accounts,  abandoned  property,  even  though  this 
deprives  certain  preferred  stockholders  of  dividends 
which  they  might  otherwise  get  ( Kansas  City  Southern 
Railway  Co.  v.  United  States,  231  U.  S.,  423). 

No  stockholder  of  a  railroad  engaged  in  inter- 
state commerce  ever  had  any  right  to  withdraw 
such  instrumentality  of  interstate  commerce  from 
business  whenever  the  method  of  regulation  did 
not  suit  him. 

Congress  Has  Complete 
Power  to  Act 

If  Congress  chooses  to  make  the  corporation 
owning  a  railroad  a  federal  instead  of  a  state  cor- 
poration, it  is  merely  exercising  its  right  to  deter- 
mine the  means  and  agencies  for  the  better  regu- 
lation of  such  commerce;  and  a  stockholder  has  no 
more  right  to  object  than  when  Congress  chooses 
cars  of  certain  designs,  and  equipped  with  certain 
appliances,  instead  of  those  selected  by  the 
owners  of  the  railroad. 

And  I  urge  that  in  considering  the  power  of 
Congress  to  require  the  federal  incorporation  of  all 
railroad  companies,  the  mistake  should  not  be 
made  of  considering  only  the  commerce  clause. 

The  "war  power"  of  Congress  under  the  Consti- 
tution— the  power  to  "declare  war,"  to  "provide 
for  the  common  defense,"  to  "raise  and  support 
armies,"  to  "provide  and  maintain  a  navy,"  to 
"repel  invasion,"  to  "organize,  arm  and  discipline 

46 


THE     SOUND     REMEDY 


the  militia,"  etc.,  etc. — is  ample  without  any  other. 
The    limits    of    that    power    have    never    been 
explored,  even  during  the  recent  world  war. 

It  was  in  the  exercise  of  that  power  that  all  the 
railroads  of  the  country — twenty  billions  worth  of 
property — were  taken  over  without  first  making  com- 
pensation and  without  question.  Northern  Pacific 
R.  Co.  vs.  North  Dakota  (decided  by  Supreme  Court, 
June  2,  1919).  If  Congress  deems  it  advisable  (it  need 
not  find  it  necessary,  mind  you),  in  times  of  peace  to 
provide  for  the  national  defense  by  converting  all 
state  railroad  corporations,  with  infinitely  varied 
powers  from  and  responsibilities  to  forty-eight  differ- 
ent states,  into  national  corporations,  with  uniform 
powers  and  responsibilities,  subject  directly  to  the 
national  government,  no  court  will  hold  that  Congress 
was  not  exercising  discretion  vested  in  it  by  the  above 
mentioned  war  powers  of  the  Constitution  even  with- 
out any  support  from  or  reference  to  the  commerce 
clause. 

The  power  seems  ample  under  any  of  these  pro- 
visions; and  the  power  to  deal  with  the  subject  existing, 
the  means  of  its  exercise  and  the  agencies  to  be  em- 
ployed are,  of  course,  matters  exclusively  within  the 
discretion  of  Congress. 

Then,  too,  there  is  the  constitutional  power  with 
reference  to  post  roads,  which  may  well  be  invoked. 

The  Reasonableness 
of  Federal  Action 

What  rights  would  be  impaired  or  taken  away 
by  requiring  the  reincorporation  under  an  act  of 
Congress  conferring  all  powers  essential  to  the 
ownership,  use  and  enjoyment  of  the  property  now 
owned? 

47 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

Only  the  right  to  be  a  state  railroad  corporation 
and  to  corporate  powers  held  by  such  corporation, 
which  might  be  greater  or  less  than  those  con- 
ferred by  Congress. 

But  would  not  the  federal  corporate  powers  be 
compensation  for  the  state  powers  that  ceased  to 
exist? 

However  that  may  be,  the  conclusive  answer  to 
any  complaint  is  that  every  state  railroad  corpora- 
tion engaged  in  interstate  commerce  was  created, 
and  every  shareholder  acquired  his  stock,  with  the 
unavoidable  knowledge  that  Congress  had  power 
under  the  Federal  Constitution  to  regulate  inter- 
state and  foreign  commerce  and  all  the  instrumen- 
talities thereof;  that  it  had  power  to  raise  and 
equip  armies  and  to  provide  for  the  national  de- 
fense; that  such  powers  were  in  no  wise  lost  or 
impaired  by  failure  or  delay  in  the  exercise  of 
them;  and  that  the  time,  the  means,  the  agencies 
and  the  methods  of  the  exercise  of  such  powers  rest 
in  the  unrestricted  discretion  of  Congress. 

This  was  the  effect  of  the  decision  in  the  Anthra- 
cite Coal  Cases  (  United  States  v.  Delaware  & 
Hudson,  213  U.  S.  366). 

By  converting  existing  state  corporations  into 
federal  corporations,  Congress  would  not  take 
away  the  property  of  the  corporation  or  of  the 
stockholders. 

It  would  not  affect  the  title  of  the  property  at 
all.  The  stock  certificates  would  represent  the 
same  relative  interest  in  the  same  property,  and 
bonds  and  notes  would  represent  the  same  debts. 

48 


THE     SOUND     REMEDY 


It  would  no  more  change  the  title  of  the  property 
or  the  rights  of  stockholders  and  creditors  than  does 
an  act  of  the  legislature  that  changes  the  name  and 
amends  the  charter  of  a  corporation  created  by  it. 

The  United  States  is  not  a  government  foreign 
to  these  corporations  and  their  stockholders,  but 
they  and  all  their  properties  are  much  more  subject 
to  it  and  to  the  will  of  Congress  than  they  are  to 
their  states. 

Congress  Should  Require  Existing 
Companies  to  Reincorporate 

With  respect  to  existing  corporations,  Congress 
should  require  them  to  reincorporate  by  filing  with 
the  designated  department  of  the  Government 
articles  of  reincorporation,  which  should  contain 
the  statements  and  declarations  Congress  may  pre- 
scribe; and  thereupon  they  should  become  federal 
corporations  instead,  of  state  corporations,  and 
possess  the  powers  which  Congress,  by  the  act  for 
reincorporation  declares  such  corporations  shall 
possess. 

The  obligations  to  creditors  and  all  other  private 
rights  and  relations  should  continue  as  before, 
and  the  stock  and  the  certificates  representing  it 
should  remain  as  before  until  transfers  are  made  in 
the  usual  manner;  and,  of  course,  the  certificates 
would,  in  form  as  well  as  in  fact,  represent  stock 
of  the  reincorporated  company. 

Some  one  has  discovered  in  this  suggestion  a  scheme 
for  validating  invalid  stock. 

49 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

Such  would  not,  and  certainly  need  not,  be  the 
effect,  for  it  could  be  provided  in  the  act  that  such 
reincorporation  should  not,  as  between  the  corporation 
and  its  stockholders  and  creditors,  create  any  new 
rights  or  obligations  or  validate  anything  already 
invalid. 

In  short,  on  a  given  day  to  be  specified  in  the 
Act  of  Congress,  all  railroad  corporations  of  the 
United  States  would  cease  to  be  state  corporations 
and  would  become  federal  corporations  with  the 
powers  set  forth  in  the  Act  of  Congress;  and  would 
thereafter  be  bound,  with  respect  to  all  corporate 
powers  and  action,  by  the  terms  of  such  act, 
rather  than  by  the  various  state  statutes  and 
special  charters. 

C.      Exclusive  Federal  Regulation  of 
Railroad  Securities 

The  necessity  for  the  exclusive  Federal  regula- 
tion of  the  issue  of  railroad  securities  seems  now  to 
be  generally  recognized,  yet  it  is  so  vital  to  railroad 
credit,  and  to  the  success  of  any  system  of  regula- 
tion which  may  be  adopted,  that  it  must  not  be 
overlooked. 

State  railroad  commissions  with  power  to  regu- 
late the  issue  of  securities  and  control  the  financing 
of  railroad  companies  became  numerous  only 
within  recent  years. 

Twelve  years  ago  only  two  commissions  had  that 
power — Massachusetts  and  Texas.  Nineteen  states 
now  have  it. 

50 


THE     SOUND     REMEDY 


In  Illinois,  Maine,  Missouri  and  Pennsylvania  it  was 
conferred  only  in  1913;  in  Arizona  in  1912;  in  Cali- 
fornia, New  Hampshire,  New  Jersey,  and  Ohio,  in 
1911;  in  Maryland,  in  1910;  in  Kansas,  Michigan,  and 
Nebraska,  in  1909;  in  Vermont,  in  1908;  and  in  Georgia, 
New  York  and  Wisconsin  in  1907. 

The  great  trunk  lines  in  the  East — Baltimore  & 
Ohio,  Erie,  New  York  Central,  Pennsylvania  and 
others  in  that  territory — were  not  subject  to  it  at  all  ten 
years  ago ;  but  now  they  must  get  the  consent  of  several 
state  railroad  commissions  before  they  can  issue  any 
stock  or  sell  any  bonds  to  raise  money;  and  such  con- 
sent is  given  in  most,  if  not  all,  of  the  states  only  after 
application,  notice,  hearing  and  deliberation  by  the 
commission. 

In  Union  Pacific  territory  only  three  states — 
Missouri,  Kansas  and  Nebraska — have  the  power. 

It  was  conferred  upon  the  Colorado  Commission  in 

1913,  but  was  annulled  by  a  referendum  election  in 

1914.  The  commissions  in  the  other  states — Wyoming, 
Utah,  Idaho,  Oregon  and  Washington — have  not  yet 
been  given  the  power. 

In  the  South,  Georgia  and  Texas  are  apparently  the 
only  states  thus  far  exercising  the  power. 

Importance  of  Prompt 
Decisions 

Time  is  of  vital  importance  in  transactions 
involving  the  sale  of  corporate  securities. 

Bankers  (and  that  includes  the  syndicates  com- 
posed of  numerous  financial  houses  and  institu- 
tions throughout  the  country  whose  co-operation 
the  originally  contracting  banker  invariably  en- 
lists and  with  whom  he  shares  his  margin  of 
profit)  are  almost  indispensable  in  floating  large 

51 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

issues;  but  bankers  never  buy  such  securities  to 
keep — only  to  sell.  If  they  bought  to  keep,  their 
capacity  to  buy  would  soon  be  exhausted. 

Their  function  is  precisely  that  of  the  ordinary 
merchant,  except  that  they  count  on  making 
quicker  sales,  and  therefore  work  on  a  smaller 
margin  of  profits  than  the  ordinary  merchant 
makes  on  his  merchandise. 

When  bankers  make  an  offer  for  an  issue  of 
bonds  or  stock  they  base  their  price  upon  current 
financial  conditions  and  quotations,  expecting  to 
make  a  quick  turnover. 

If  they  are  required  to  wait  for  the  delivery  of 
the  securities  they  reduce  the  price  to  cover  the 
risks  of  financial  changes  in  the  meantime,  and  the 
seller  gets  less  for  his  securities. 

If  the  period  of  waiting  is  long  or  indefinite  and 
the  transaction  is  a  large  one,  bankers  sometimes 
will  not  buy  at  all — particularly  if  the  financial 
world  has  any  menacing  features. 

But  in  any  case,  the  longer  the  delay  the  lower 
the  price,  because  of  the  greater  risk. 

If  a  railroad  company  is  compelled  to  go  to  half  a 
dozen  state  railroad  commissions  for  permission  to 
make  an  issue  of  stock  or  bonds,  and  to  encounter 
delays  running  from  weeks  to  months  on  account  of 
numerous  bearings  before  different  commissions, 
and  in  meeting  their  conflicting  policies  and  views, 
before  it  can  deliver  the  securities,  it  will  be  impos- 
sible to  have  the  issue  underwritten,  or  if  under- 
written at  all  the  cost  will  be  excessive. 

52 


THE     SOUND     REMEDY 


State  Commissions  Not  Always 
Consistent  With  Each  Other 

But  worse  still,  the  chances  are  that  differences 
between  the  commissions  will  arise,  or  that  the 
inexperience  and  perhaps  the  financial  theories  of 
some  of  the  many  commissioners  may  require 
changes  that  will  upset  the  plan  entirely. 

Indeed,  some  states,  in  effect,  deny  railroad 
companies  the  right  to  borrow  money  for  improve- 
ment at  all. 

As  attorney,  and  afterwards  as  president  of  the 
Southern  Pacific,  I  had  to  do  and  was  quite  familiar 
with  the  working  of  the  Texas  law  regulating  railroad 
stock  and  bonds,  from  the  time  of  its  enactment  in 
1893  until  the  termination  of  my  connection  with  the 
Southern  Pacific  in  1913. 

Without  reference  to  branches  and  other  subordinate 
lines,  the  Southern  Pacific  Sunset  Route,  made  up  of 
steamers  from  New  York  to  New  Orleans  and  Galves- 
ton,  thence  by  rail  to  Los  Angeles,  San  Francisco,  and 
Portland,  runs  through  the  State  of  Texas  for  936 
miles  from  the  Texas-Louisiana  boundary  to  the  Rio 
Grande  River  at  El  Paso,  with  a  line  diverging  from 
this  at  Houston  and  extending  to  Galveston. 

Yet  under  the  stock  and  bond  law  of  1893,  as  admin- 
istered by  the  Texas  Railroad  Commission,  not  a 
dollar  of  bonds  or  a  share  of  stock  has  been  issued 
against  or  on  account  of  this  line  for  the  necessary 
betterments  and  additions,  of  this  great  trans- 
continental line  of  railroad  in  Texas  since  the  Texas 
statute  was  enacted  in  1893  to  this  day. 

The  Gulf  Line  of  the  Santa  Fe,  extending  from  a 
connection  with  the  main  system  in  Oklahoma,  thence 
through  Texas  to  the  Gulf,  is  in  the  same  situation. 

53 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

Not  a  bond  or  share  of  stock  has  been  issued  in  over 
20  years  for  the  improvement  of  that  great  outlet  for 
interstate  and  foreign  commerce  from  the  Northwest. 

The  money  needed  for  the  improvement  of  the 
Texas  lines  of  the  Southern  Pacific  and  Santa  Fe  systems, 
when  forthcoming  at  all,  has  been  furnished  by  the 
parent  systems  by  direct  loan,  without  security,  from 
their  treasuries  outside  of  the  State  and  by  foregoing 
dividends  of  the  Texas  companies  from  time  to  time  to 
which  they  were  fairly  entitled. 

Much  of  the  lines  mentioned — more  than  half  of  the 
Southern  Pacific  from  the  Louisiana  boundary  and  the 
Gulf  to  the  New  Mexico  boundary — is  unproductive 
and  would  not  pay  operating  expenses  except  for  the 
through  business. 

No  argument  should  be  needed  to  show  that  the 
transcontinental  lines  of  railroad  extending  from  New 
Orleans  on  the  Mississippi  River  and  Galveston  on 
the  Gulf  to  the  Pacific  Ocean,  and  the  lines  from  the 
grain  fields  of  Oklahoma,  Kansas,  Missouri,  Nebraska, 
Iowa,  etc.,  to  the  Gulf — particularly  those  under  the 
same  stock  ownership  and  operated  as  a  single  line — 
ought  to  be  regulated,  in  their  financial  operations  at 
least,  by  the  Government  that  regulates  interstate 
and  foreign  commerce. 

Plan  to  Regulate  Securities  Should  Be 
Flexible  and  Workable 

Considering  now  the  method  or  character  of 
regulation  to  be  prescribed  by  Congress  to  govern 
the  issue  and  sale  of  railroad  securities: 

//  is  all  important  that  it  be  made  flexible  and 
practically  workable. 

The  issue  of  railroad  securities  does  not  call  for 
the  exercise  of  a  judicial  function,  but  it  is  a  busi- 
ness matter;  and  whether  the  necessity  exists  and 

54 


THE     SOUND     REMEDY 


the  conditions  are  favorable  are  not  judicial 
questions,  but  are  business  questions. 

Yet  all  the  state  commissions,  in  practice,  deal 
with  this  purely  business  question  as  if  it  were  a 
matter  for  judicial  inquiry  and  determination,  and 
employ  the  elaborate  procedure  and  machinery 
appropriate  only  to  judicial  proceedings. 

The  result,  of  course,  is  delay — delay  for  plead- 
ings, delay  for  process,  delay  for  witnesses,  for 
hearings  and  arguments;  and  delay  sometimes  for 
writing  elaborate  opinions  which  are  to  become 
precedents.  This  is  intolerable  under  financial 
distress,  and  in  the  frequent  and  quick  changes  in 
financial  conditions  and  markets.  Moreover,  it  is 
wholly  unnecessary. 

What  the  People  Really  Seek 
Through  Regulation 

What  the  Government  and  the  people  wish  to 
prevent  is  the  issue  of  stock,  bonds  or  other  railroad 
securities  for  improper  or  unnecessary  purposes 
and  without  adequate  consideration — "watered" 
or  otherwise  fraudulent  securities. 

This  accomplished,  the  Government  and  the 
people  are  interested  in  encouragiug  and  expediting 
the  issue  and  sale  of  the  railroad  securities  necessary 
to  procure  the  money  required  to  provide  the  trans- 
portation facilities  which  the  people  must  have. 

They  are  interested  in  having  the  money  pro- 
cured in  the  shortest  time  and  with  the  least  waste 
and  loss  through  the  working  of  cumbersome  gov- 

55 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

ernment  machinery,  and  at  the  best  rates  obtain- 
able by  the  corporation. 

Hence  the  machinery  provided  should  be  as  simple 
as  possible  to  accomplish  these  objects,  and  especially 
should  it  be  unencumbered  by  judicial  forms  and 
methods  of  procedure. 

It  is  purely  and  only  an  executive  function — de- 
termining whether  the  purposes  are  within  the 
corporate  powers  and  otherwise  lawful,  whether 
the  terms  of  the  issue  are  consistent  with  the  public 
interest,  and  what  if  any  special  provisions  should 
be  made  to  assure  the  application  of  the  money  to 
the  purposes  authorized. 

The  circumstances  of  the  cases  vary  greatly — 
with  the  financial  strength  and  credit  of  the  differ- 
ent companies  and  the  extent  and  character  as 
well  as  the  purposes  of  the  proposed  issue,  and  in 
other  respects. 

What  is  needed  is  a  governmental  agent  or  agency 
with  the  ability  and  authority  to  take  hold  of 
each  case  and  deal  with  it  in  a  businesslike  way  and 
without  regard  to  forms  or  methods  of  procedure. 

Some  applications  can  be  safely  disposed  of  within 
an  hour:  others  will  require  days  and  weeks  of  examina- 
tion and  consideration. 

I  do  not  believe  that  this  duty  should  be  imposed 
upon  the  Interstate  Commerce  Commission,  first 
because  it  is  too  much  judicial  in  its  organization  and 
methods,  and  secondly  because  it  has  and  will  have 
more  than  it  can  do  without  this. 

A  Cabinet  Minister  assisted  by  two  or  three  experts 
would  be  the  best  agency,  but  if  that  is  not  possible, 

56 


THE     SOUND     REMEDY 


then  some  Executive  Commission  consisting  of  not  over 
three  men  commanding  the  public  confidence. 


1).      Exclusive  Federal  Regulation  of 
Freight  and  Passenger  Rates 

Argument  in  support  of  the  power  of  Congress  to 
regulate  intrastate  as  well  as  interstate  freight  and 
passenger  rates  seems  unnecessary. 

The  decisions  of  the  Supreme  Court  in  the 
Minnesota  Rate  Case  (230  U.  S.  352)  and  in  the 
Shreveport  Case  (234  U.  S.,  342)  determined  that 
question,  and  I  shall  therefore  discuss  only  the 
practical  necessity  for  the  exercise  of  the  power. 

It  is  notorious  that  many  of  the  state  com- 
missions grossly  discriminate  in  favor  of  their  own 
citizens  in  the  matter  of  both  passenger  and  freight 
rates,  and  in  favor  of  merchants,  manufacturers 
and  producers  in  their  own  states  against  citizens 
of  other  states. 

This  discrimination  is  not  only  unjust  as  between 
the  particular  individuals  concerned,  but  rate 
adjustments  are  often  such  as  to  relieve  the 
intrastate  traffic  of  some  states  from  contributing 
its  just  share  to  the  transportation  expenses  of  the 
nation.  The  effect  moreover  has  often  disturbed 
and  disarranged  the  structure  of  interstate  rates 
and  fares. 

Very  great  inequality  and  discriminations  were 
created  by  many  of  the  states  in  recent  years  in 
establishing — sometimes  by  statute  and  sometimes  by 
Railroad  Commission  order — a  rate  of  two  cents  per 

57 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

mile  for  passengers,  while  the  interstate  rate  was 
three  cents. 

The  effect  of  this  was  not  only  to  discriminate  in 
favor  of  intrastate  traffic,  but  to  force  a  reduction  in 
interstate  rates  which  the  commission  apparently 
desired  to  maintain. 

The  action  of  some  of  the  states  in  the  controversies 
over  the  conflicting  regulations  with  respect  to  pas- 
senger rates  is  too  familiar  to  require  further  statement. 

The  power  of  many  of  the  states  to  disturb  and 
even  dictate  interstate  rate  adjustments  on  freight 
is  much  greater  than  with  respect  to  passenger 
rates. 

State  Commissions  Often  Dictate 
Interstate  Rates 

Indeed  it  is  not  too  much  to  say  that  the  present 
interstate  and  foreign  rates  on  traffic  of  immense 
volume  and  importance  from  very  large  sections 
of  the  country  have  been  practically  dictated  by 
state  commissions. 


The  power  rests  in  a  greater  or  less  degree  in  all  the 
states  bordering  on  tide-water  and  basing  points. 

It  is  obvious  that  the  State  of  Pennsylvania,  by  its 
local  rates,  can  practically  dictate  the  rates  on  anthra- 
cite and  other  coal  to  New  York  and  New  England,  or 
upset  any  adjustment  of  such  rates  that  the  Interstate 
Commerce  Commission  may  make. 

So  Maryland,  by  its  local  rates  to  Baltimore,  may 
dislocate  and  disturb  the  entire  interstate  rate  adjust- 
ment on  bituminous  coal,  not  only  from  mines  in  that 
state,  but  from  West  Virginia,  Pennsylvania,  Ohio,  etc., 
to  all  points. 

58 


THE     SOUND     REMEDY 


The  Carolinas,  Georgia  and  Alabama  may  upset  the 
rate  situation  not  only  on  important  commodities  like 
cotton  and  lumber,  but  merchandise  and  commerce 
generally. 

The  Texas  Railroad  Commission  for  years  has  dic- 
tated the  interstate  rates  and  rate  adjustments  on 
cotton,  grain,  merchandise  and  commerce  generally  in 
the  Southwest. 

Its  control  over  the  local  rates  to  the  Gulf  ports 
from  a  great  interior  territory  enables  it  to  force  an 
adjustment  of  interstate  rates  throughout  a  very  large 
section. 

In  addition  to  this,  it  has  long  coerced  the  Texas 
railroads  into  adopting  whatever  interstate  rates  or 
whatever  adjustments  or  differentials  in  interstate 
rates  it  desired. 

It  has  threatened  the  Texas  railroads  with  punish- 
ment by  a  reduction  of  local  rates,  and  has  made  the 
threats  good  by  inflicting  punishment  in  many  in- 
stances when  its  wishes  with  respect  to  interstate  rates 
were  disregarded. 

Many  instances  can  be  cited  in  proof  of  this,  but  I 
believe  my  statement  will  not  be  questioned. 

Indeed  the  Shreveport  Case  is  a  striking  instance. 
In  a  word,  the  Texas  Commission,  by  the  order  there 
in  question,  required  the  Texas  railroads  to  maintain 
interstate  rates  sufficient  to  prevent  the  city  of 
Shreveport  from  competing  with  Dallas  and  Houston 
in  Texas  localities  much  nearer  Shreveport  than  to 
either  of  the  Texas  cities.  (H.  E.  &  W.  T.  R.  Co.  v. 
£7.5.234  U.S.  342.) 

And  this  same  policy  has  been  applied  for  years  by 
the  Texas  Commission  in  forcing  such  differentials  and 
rate  adjustments  as  it  wished  as  between  Texas  jobbing 
centers  on  the  one  hand  and  New  Orleans,  Shreveport, 
St.  Louis,  Kansas  City,  Chicago,  etc.,  on  the  other 
hand. 

59 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

This  policy  and  practice  of  coercion  to  a  greater 
or  less  degree  may  be  exercised  by  any,  and  prob- 
ably is  exercised  by  many,  of  the  state  commissions 
in  the  interest  of  the  communities  that  elected 
them,  as  against  the  citizens  and  communities  of 
other  states. 

Present  Plan  Involves  Discrimination 
and  Evasion  of  Obligations 

But  discrimination  is  not  the  only  feature  of  the 
system. 

It  is  the  evasion  of  the  obligation  of  all  the  traf- 
fic to  bear  as  equitably  as  possible  a  just  share  of 
the  burden  of  transportation,  which  is  a  matter  of 
national  concern. 

If  the  national  commission  holds  that  a  three- 
cent  fare  is  necessary  to  make  passenger  traffic 
bear  a  proper  share  of  the  railroad  transportation 
expenses,  no  state  should  be  allowed  to  escape  its 
just  portion  by  a  two-cent  rate. 

When  the  national  commission  finds  that  a  cer- 
tain amount  of  revenue  is  necessary  to  provide  and 
maintain  the  transportation  facilities  which  the 
nation  requires,  no  state  commission  should  be 
allowed  to  relieve  its  shippers  from  their  share  of 
the  burden. 

And  more  important  still,  when  the  national  com- 
mission establishes  or  recognizes  a  rate  adjustment 
affecting,  as  such  adjustments  always  do,  a  large 
territory,  many  states,  and  varied  interests,  no  state 
commission  should  have  authority  to  disturb  it. 

60 


THE     SOUND     REMEDY 


Exclusive  Federal  Authority 
the  Only  Solution 

My  conviction  is  that  the  only  way  to  accomplish 
this  is  to  give  the  Federal  Government  exclusive 
authority  to  regulate  all  railroad  rates,  intrastate 
as  well  as  interstate. 

The  proposal  embodied  in  some  of  the  "Plans" 
put  forward,  to  leave  authority  over  state  rates 
with  the  state  commissions,  but  to  authorize  the 
Interstate  Commerce  Commission  to  suspend  or 
make  the  rates  whenever  it  finds  such  action 
necessary,  will  not  suffice. 

That  is  the  law  now,  as  declared  by  the  Supreme 
Court  in  the  Shreveport  Case  and  in  the  Minnesota  Rate 
Case. 

It  has  been  utterly  ineffective  in  the  past,  and  it  will 
prove  so  in  the  future,  simply  because  the  Interstate 
Commerce  Commission  will  not  exercise  the  authority. 

The  state  commissions  are  politically  powerful  and 
aggressive.  The  Interstate  Commerce  Commission  is 
not. 

Most  of  the  state  commissions  have  ample  leisure  for 
action  and  controversy.  The  Interstate  Commerce 
Commission  has  not. 

Then  there  is  the  "comity"  that  one  overworked 
tribunal  is  so  ready  to  observe  toward  another  tribunal. 

And  then  there  is  the  lack  of  primary  and  direct 
responsibility  for  the  rates,  without  which  the  Interstate 
Commerce  Commission  cannot  be  induced  to  overrule 
or  interfere  with  the  state  commission's  action. 

With  all  the  relief  that  can  be  given  it,  by  trans- 
ferring some  of  its  duties  to  other  agencies,  the  duties 
of  the  Interstate  Commerce  Commission  in  the  future 
will  be  far  heavier  and  more  exacting  than  ever  in  the  past . 

61 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

No  human  tribunal  thus  burdened  will  take  on  any 
additional  work  which  it  can  conscientiously  avoid. 

Under  the  suggestions  mentioned,  it  must  first  be 
convinced  of  its  duty  to  interfere  with  the  state  com- 
missions, and  "there's  the  rub." 

It  will  refuse  to  be  convinced;  and  being  uncon- 
vinced, it  will  be  under  no  duty  to  interfere. 

The  inevitable  result  will  be  that  the  state  com- 
missions will  in  the  future,  as  in  the  past,  work  in  the 
interest  of  their  respective  states  and  local  situations, 
neutralizing  the  benefits  of  national  regulation. 

Important  Functions  of  the 
State  Commissions 

I  do  not  advocate  the  abolition  of  the  state  com- 
missions. There  are  many  important  functions 
for  them  to  perform. 

There  are  not  only  public  utilities  of  various 
kinds,  such  as  street  railways,  interurban  railways, 
electric  light  and  power  companies,  water  companies, 
etc.,  which  they  ordinarily  regulate,  but  the  ordi- 
nary police  powers  of  the  states  with  respect  to 
the  railroads,  not  involved  in  the  matter  of  rates 
and  through  service,  could  be  left  to  them;  and 
they  could  perform  a  most  important  duty  to  the 
people  of  their  states  and  to  the  national  authori- 
ties by  observing  the  working  operation  of  the 
railroads  and  the  effect  of  the  rates  in  their  respec- 
tive states,  and  bringing  before  the  federal  authori- 
ties just  causes  of  complaint  for  rectification. 

And,  of  course,  I  am  not  suggesting  that  the 
Interstate  Commerce  Commission  may  itself 
regulate  directly  all  the  railroad  rates  of  the 
United  States. 

62 


THE     SOUND     REMEDY 


Regional  Commissions 
Absolutely  Necessary 

A  number  of  subordinate  commissions  in  different 
districts  or  regions  will  be  necessary  in  any  event 
if  we  are  to  overcome  insufferable  delay,  whether 
jurisdiction  is  limited  to  interstate  or  is  extended  to 
include  intrastate  rates. 

But  this  appertains  more  particularly  to  the 
question  of  administrative  machinery. 

Organization  is  as  essential  in  railroad  transpor- 
tation as  engines  and  cars. 

We  have  organizations  by  companies  and  system, 
but  there  must  be  for  the  government  the  organiza- 
tion necessary  to  govern  and  manage  these  com- 
panies and  systems  in  their  relations  with  each 
other  and  with  the  public,  and  so  to  co-ordinate 
them  as  to  have  them  supply  the  nation  with  the 
transportation  needed,  as  it  is  needed,  and  at 
reasonable  rates.  That  is  the  problem  of  the 
Government. 

We  already  have  laws  prescribing  what  is  right 
and  prohibiting  what  is  wrong  in  most  railroad 
activities. 

These  laws  operate  upon  the  railroad  companies 
and  their  officers,  severally  and  individually. 

But  they  no  more  dispense  with  proper  organiza- 
tions acting  for  the  Government  than  the  signing  of  a 
charter  for  a  company  dispenses  with  the  necessity 
for  an  organization  to  manage  and  conduct  its 
business. 

I  realize  that  this  is  a  somewhat  primary  state- 

63 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

ment  of  principles,  but  I  wish  to  be  sure  that  the 
point  is  made  clear. 

Questions  of  Rates  Must 
Be  Settled  Quickly 

Questions  of  transportation  rates  and  commerce 
cannot  endure  delay. 

Changes  in  trade  and  trade  relations  are  frequent 
and  rapid,  and  rates  must  be  adjusted  to  them.  A 
railroad  or  group  of  railroads  may  become  bankrupt 
waiting  for  an  increase  in  rates  pending  a  long  and 
tedious  proceeding,  involving  the  examination  of  many 
witnesses,  the  argument  of  many  counsel,  the  prepara- 
tion, printing  and  reading  of  many  briefs,  and  the 
writing  of  carefully  expressed  opinions. 

An  industry  or  business  or  community  may  suffer 
irreparable  injury  through  some  sudden  shift  or  new 
development  in  commercial  or  transportation  conditions. 

Any  system  of  regulation  which  does  not  provide  for 
prompt  action  and  prompt  decision  of  all  transporta- 
tion questions  will  bear  heavily  upon  commerce  and 
business. 

That  the  Interstate  Commerce  Commission  is 
already  burdened  with  more  than  it  can  do  is  obvious. 

Take  down  any  volume  of  the  reports  of  the  Com- 
mission's decisions  and  run  through  the  cases  and 
observe  the  figures  at  the  top  showing  the  date  when 
they  were  submitted  and  the  date  when  they  were 
decided,  and  bear  in  mind  that  they  were  commenced 
long  before  they  were  submitted  in  argument. 

It  is  clearly  necessary  that  the  Interstate  Com- 
merce Commission  must  not  only  be  relieved  of  all 
of  its  purely  executive  and  administrative  work, 

64 


THE     SOUND     REMEDY 


but  be  aided  by  subordinate  commissions,  if  it  is 
to  perform  the  function  which  all  seem  to  agree 
should  be  vested  in  it  as  the  best  agency  for  that 
purpose,  namely,  the  determination  of  rate  ques- 
tions. 

The  Interstate  Commerce  Commission 
Overburdened  by  Its  Present  Functions 

The  system  of  regulation  we  now  have  imposes 
on  the  Interstate  Commerce  Commission  execu- 
tive, judicial  and  legislative  functions  of  great 
difficulty  and  importance,  and  all  plans  thus  far 
suggested  contemplate  enormous  additions  to  such 
functions. 

The  Commission  is  already  obviously  over- 
burdened, and  only  by  relieving  it  of  its  executive 
duties,  for  which  such  a  body  is  least  suited,  can  it 
perform  its  more  important  semi-judicial  functions, 
for  which  it  is  qualified  and  equipped. 

The  exercise  of  a  judicial  function  (in  a  general 
rather  than  a  technical  sense)  is  called  for  when  a 
complaint  is  made  that  a  rate  is  excessive  to  the 
shipper  or  unremunerative  to  the  carrier,  or  dis- 
criminates as  between  individuals  or  communities 
or  commodities,  or  is  otherwise  unreasonable. 

This  calls  for  inquiry,  the  taking  of  testimony 
and  a  determination  of  the  point  at  issue. 

The  "executive  function"  embraces  innumerable 
activities;  it  is  the  initiation,  the  beginning  of 
practically  everything  (but  limiting  it  to  such  as 
the  Government,  as  distinguished  from  the  cor- 
poration, should  exercise) ;  it  must  include  supply- 

65 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

ing  the  transportation  which  the  country  needs, 
the  kind  and  quality  of  roadway,  structures, 
equipment  and  other  facilities  and  the  proper 
maintenance  of  them;  all  measures  of  safety  and 
economy;  trains  and  train  service;  the  initiation  of 
rates;  the  constant  adjustment  and  readjustment 
of  transportation  to  changing  traffic  conditions, 
etc.,  etc. 

While,  of  course,  the  Government  will  not  under- 
take all  of  this  under  private  ownership,  it  will 
continue  to  exercise  most  of  the  powers  held 
under  existing  laws  and  such  additional  powers 
as  may  be  deemed  necessary. 

The  Present  Executive  Functions 
of  the  Commission 

Let  us  consider  first  the  executive  powers  which 
have  already  been  conferred  upon  the  Interstate 
Commerce  Commission. 

The  Commission,  by  amendments  of  the  Act  to 
Regulate  Commerce,  has  been  given  supervision  of  the 
car  service,  one  of  the  most  important  and  difficult 
features  of  railroad  transportation,  calling  for  super- 
vision distinctively  executive  in  character,  which 
especially  needs  the  power  and  authority  of  an  officer 
who  can  act  daily  and  instantly  to  meet  emergencies, 
which  the  Commission,  with  the  cumbersome  machin- 
ery inevitably  incident  to  a  semi-judicial  body,  cannot 
do. 

Section  12  of  the  Act  requires  the  Commission  to 
inquire  into  the  management  of  the  business  of  the 
carriers  and  to  keep  itself  informed  in  regard  thereto, 
and  to  enforce  all  the  provisions  of  the  Act,  which 

66 


THE     SOUND     REMEDY 


include  requirements  for  the  publication  of  tariffs,  the 
construction  of  switch  connections  and  various  other 
facilities,  the  strict  observance  of  the  published  tariffs, 
the  prohibition  of  rebates  and  secret  rates,  the  observ- 
ance of  accounting  regulations — in  short,  the  employ- 
ment and  direction  of  a  large  and  ever  diligent  inspec- 
tion force,  not  merely  with  a  view  to  prosecution  of 
violation  of  penal  provisions  of  the  Act,  but  to  secure 
the  faithful  observance  of  the  multitude  of  regulations 
prescribed  by  the  Act  and  by  the  Commission  under  it. 

This  wide  and  important  field  of  governmental  activ- 
ity is  purely  executive,  for  which  a  commission  or  like 
tribunal  is  in  no  wise  fitted. 

One  of  the  most  substantial  and  insistent  com- 
plaints of  railroad  owners  and  executives  is  that  the 
performance  of  these  executive  duties  of  detection  and 
prosecution,  and  the  state  of  mind  to  which  such  point 
of  view  leads,  tend  naturally  and  inevitably  to  unfit 
the  Commissioners  to  act  impartially  in  determining 
controversial  matters  which  the  law  commits  to  them 
for  decision. 

Under  Section  10  of  the  Clayton  Act,  approved 
October  15,  1914,  reports  are  required  to  be  filed  with 
the  Interstate  Commerce  Commission  with  respect  to 
competitive  bidding  for  railroad  material  and  supplies, 
and  for  railroad  securities,  affecting  corporations  with 
common  officers,  stockholders,  etc.,  and  Section  11  of 
the  Act  expressly  vests  in  the  Interstate  Commerce 
Commission  the  power  and  duty  to  enforce  the  Clayton 
Act  insofar  as  it  affects  common  carriers. 

The  Interstate  Commerce  Commission  is  also 
charged  with  the  enforcement  of  the  Government 
Aided  Railroad  and  Telegraph  Act  of  August  7,  1888 
(25  Statutes  382). 

The  Commission  also  is  given  various  duties  with 
reference  to  railway  mail  service  pay  by  Section  5  of 

67 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

39  Statutes  412  and  to  the  parcels  post  by  Section  8  of 
37  Statutes  558. 

The  Commission  is  charged  with  the  administration 
and  enforcement  of  the  Safety  Appliance  Acts  (27 
Statutes  531;  32  Statutes  943;  36  Statutes  298);  and 
under  these  Acts  has  been  required  to  deal  with  ques- 
tions relating  to  the  application  of  driving  wheel  brakes, 
train  brakes,  automatic  couplers,  grab  irons,  hand 
holds,  height  for  draw  bars  of  freight  cars,  percentage 
of  power  brake  cars  required  in  trains,  the  application 
of  sill  steps,  hand  brakes,  ladders  and  running  boards; 
required  to  designate  the  number,  dimension,  location 
and  manner  of  application  of  safety  appliances;  and  is 
authorized  to  employ  and  has  employed  and  super- 
vised the  work  of  a  large  number  of  inspectors  under 
the  Safety  Appliance  Acts. 

The  Commission  is  also  required  by  the  Accident 
Report  Act  (36  Statutes  350)  to  obtain  reports  of  all 
collisions,  derailments  or  other  accidents  resulting 
in  injury  to  persons,  equipment  or  road  bed,  and  is 
authorized  to  investigate  all  such  accidents  and 
required  to  report  thereon;  also  "to  execute  and  en- 
force the  provisions"  of  the  Hours  of  Service  Act  (34 
Statutes  1415),  also  the  "Ash  Pan  Act"  (35  Statutes 
476) ,  and  is  also  required  to  prescribe  regulations  under 
the  Transportation  of  Explosives  Act. 

The  Commission  is  also  charged  with  the  enforce- 
ment of  the  Boiler  Inspection  Act  and  has  a  consider- 
able organization  for  that  purpose,  and  it  is  also 
required  to  investigate  and  report  on  the  use  of  and 
necessity  for  block  signal  systems  and  appliances  for 
the  automatic  control  of  railway  trains,  etc.  All  these 
are  purely  executive  duties. 


68 


THE     SOUND     REMEDY 


E.      Creation  of  a  Government  Department 
of  Transportation 

It  must  be  apparent  that  these  duties  relating  to 
the  quality  and  character  of  the  service  rendered 
by  the  railroads,  to  the  application  of  safety  appli- 
ances and  the  maintenance  of  the  same,  to  the 
condition  of  engines  and  other  equipment,  and  to 
the  investigation,  detection  and  prosecution  of 
violations  of  the  law,  and  regulations  with  respect 
to  accident  reports,  etc.,  etc.,  could  be  very  much 
more  promptly  and  effectively  handled  in  an 
executive  department  of  the  Government  than  by 
a  semi-judicial  tribunal  that  can  act  only  in  con- 
ference. 

But  the  greatest  advantage  would  be  the  time  it 
would  give  the  Commission  for  the  performance  of 
its  more  important  duties  of  passing  upon  rates  and 
determining  questions  which  only  such  a  body 
can  properly  determine,  and  also  in  relieving  that 
Commission  of  the  petty  prosecuting  activities 
which  tend  to  unfit  its  members  for  their  more 
important  duties. 

A  Department  of  Transportation  should  be 
created  to  take  over  and  perform  the  executive  and 
administrative  functions  devolving  upon  the  Inter- 
state Commerce  Commission  under  existing  laws, 
and  any  created  by  additional  statutes. 

I  believe  that  the  head  of  the  Department  of 
Transportation  should  be  a  member  of  the  Cabinet. 

69 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

As  I  was  the  first  railroad  executive,  so  far  as  I 
know,  to  suggest  that  a  Cabinet  member  be  put  at 
the  head  of  a  Department  of  Transportation,  and 
as  I  believe  very  strongly  in  the  wisdom  of  it,  I 
shall  state  briefly  my  reasons,  which  go  further 
than  merely  relieving  the  Commission  of  its  execu- 
tive duties. 

Reasons  Why  Head  of  Transportation 
Department  Should  Be  Member  of  Cabinet 

It  soon  becomes  obvious  to  any  one  who  has 
opportunity  to  observe  that  executive  and  admin- 
istrative functions  cannot  be  efficiently  exercised 
by  boards,  commissions  or  committees. 

There  was  demonstration  of  this  in  Washington 
during  the  recent  war.  The  larger  the  board  or 
commission,  the  more  cumbersome  or  difficult 
becomes  the  task;  and  the  abler  and  stronger  as 
executives  the  individuals  are,  the  more  likely  that 
the  board  or  commission  will  become  a  debating 
society,  making  but  little  progress  with  the  work, 
unless,  of  course,  they  avoid  conflicts  by  leaving 
the  work  to  subordinates. 

Recent  experience  has  demonstrated  the  neces- 
sity for  a  national  Government  officer  to  meet 
emergencies  resulting  from  exceptional  congestion 
in  traffic  or  through  blockades  of  transportation,  by 
quickly  mobilizing  the  transportation  resources, 
and  by  the  arbitrary  diversion,  if  need  be,  of  traffic 
from  lines  which  cannot  handle  it  to  lines  which  can, 
and  by  other  instant  and  heroic  methods. 

70 


THE     SOUND     REMEDY 


How  can  the  Interstate  Commerce  Commission, 
or  any  similar  body,  exercise  promptly  and  ade- 
quately this  extraordinarily  important  and  difficult 
executive  power  which  requires  immediate  and 
varied  action  from  day  to  day  to  be  of  any  value? 

They  could  make  orders  and  appoint  some  sub- 
ordinate, who,  when  appointed,  could  be  directed 
only  by  other  orders  or  general  rules,  since  the 
Commission  cannot  act  except  through  quorums. 

A  power  so  vast  should  be  committed  to  no  Com- 
mission employe,  and  to  no  officer  of  less  rank 
than  a  Cabinet  member,  who  is  a  part  of  the 
Administration  and  is  in  direct  touch  with  the 
President  and  can  change  his  orders  instantly  to 
meet  changing  conditions. 

I  have  already  indicated  in  my  discussion  of  the 
issue  of  railroad  securities  the  importance  of  prompt 
and  businesslike  Government  action  with  respect  to 
that  very  important  matter. 

Then  in  the  matter  of  service,  a  Cabinet  officer 
by  calling  in  railroad  executives,  and  through 
informal  discussions,  could  bring  about  changes 
in  train  service,  schedules,  and  other  things  desired 
by  the  public,  which  if  taken  up  with  the  elaborate 
formality  and  procedure  inevitable  in  cases  of  a 
commission  or  similar  body,  would  not  be  accom- 
plished for  weeks,  and  possibly  months. 

In  other  words,  a  single  executive  representing 
the  Government  in  all  these  important  matters 
of  service  could  get  instant  touch  with  the  railroad 
executives,  and  secure  action  with  respect  to  these 
matters  of  such  vital  importance  to  the  public  very 

71 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

much  quicker  than  would  be  possible  by  the  slow 
moving  procedure  of  any  board  or  commission. 

The  Secretary  would  not  be  hemmed  about  by 
any  judicial  conceptions,  but  could  "talk  across  the 
table"  to  the  railroad  executives  about  what  was 
needed  and  what  should  be  done. 

If  his  wishes  were  not  complied  with,  he  could 
bring  the  matter  before  the  Interstate  Commerce 
Commission  by  formal  complaint;  but  in  nine 
cases  out  of  ten  his  demands  for  service  and 
facilities,  if  at  all  reasonable,  would  be  met. 

I  understand  that  one  of  the  principal  objections 
urged  to  a  Secretary  of  Transportation  is  the  political 
possibilities  of  the  position. 

I  am  not  an  authority  on  that  subject,  but  I  do  know 
that  he  would  not  profit  politically  by  his  contact  with 
railroad  executives,  for  there  is  no  class  in  this  country 
with  less  political  power  than  railroad  officers;  and  I 
do  not  see  how  the  Secretary  could  himself  control  the 
votes  of  railroad  employes. 

They  would  not  be  his  employes  or  Government 
employes,  but  would  be  employed  by  the  railroad 
companies. 

Neither  would  the  position  be  at  all  analogous  to 
that  of  the  Director  General  of  Railroads,  who  is  in 
absolute  possession  and  control  of  the  railroads, 
prescribes  the  organization,  selects  the  personnel, 
employs  and  discharges  men,  fixes  all  wages  and  sal- 
aries and  is  the  unhampered  employer  and  chief  of  all 
the  railroad  forces  of  the  country. 

He  spends  hundreds  of  millions  of  dollars  in  the 
purchase  of  equipment,  coal  and  materials  and  supplies 
of  all  kinds,  and  has  power  beyond  that  ever  exercised 

72 


THE     SOUND     REMEDY 


by  any  man  in  the  United  States  excepting  only  the 
President. 

The  Secretary  of  Transportation,  however,  would 
prescribe  no  organization,  would  select  no  personnel, 
would  employ  nobody  and  fix  nobody's  wages  or  salaries 
except  the  small  clerical  force  in  his  immediate  depart- 
ment. 

He  would  buy  no  materials  or  supplies,  and  would 
be  without  any  authority  or  control  whatever  over  the 
wages  or  working  conditions  or  action  in  any  respect 
of  the  army  of  railroad  employes  in  this  country. 

He  would  be  a  member  of  the  President's  Cabinet 
and  head  of  a  Government  Department  charged  with 
the  duty  of  enforcing  laws  relating  to  the  railroads, 
observing  their  operation,  recommending  improve- 
ments and  changes  in  the  public  interest  and  bringing 
before  the  prosecuting  officers  of  the  Government 
violations  of  the  railroad  laws;  and  presenting  to  the 
Interstate  Commerce  Commission  by  complaint  any 
failure  of  railroad  companies  to  provide  the  service  and 
facilities  to  which  he  thought  the  public  was  entitled. 

I  do  not  contend  that  these  functions  may  not  be 
performed  by  a  Transportation  Department  composed 
of  a  small  number  of  commissioners,  but  I  do  insist 
that  they  cannot  be  performed  as  well,  in  any  com- 
parable degree,  as  by  a  Cabinet  member. 

The  Railroad  Business  Needs 
"A  Friend  at  Court" 

But  a  stronger  reason  still  why  a  Cabinet 
member  should  be  at  the  head  of  the  Transporta- 
tion Department  is  that  the  railroad  business  is 
unrepresented  in  the  Government — is  without  any 
''friend  at  Court." 

It  is,  I  understand,  the  largest  single  industry  in 
the  United  States  next  to  agriculture,  and  cer- 

73 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

tainly  there  is  none  more  vital  to  the  very  life  of  the 
nation,  and  yet  neither  in  the  President's  Cabinet 
nor  anywhere  in  the  vast  machine  constituting  the 
Government  of  the  United  States  is  there  a 
department  or  bureau  or  agency  or  officer  of  any 
kind  or  description  whose  duty  it  is  to  look  after 
its  interest,  to  defend  it,  to  speak  for  it,  or  to  say  a 
word  for  justice  in  its  behalf. 

The  Interstate  Commerce  Commission  was  con- 
ceived in  hostility  to  it. 

The  Interstate  Commerce  Act  was  designed  to 
repress  and  regulate  and  punish  it. 

Running  throughout  the  Interstate  Commerce 
Act  and  all  other  statutes  on  the  books  of  Congress 
relating  to  the  railroads  is  an  unmistakable  spirit 
and  purpose  to  curb  and  repress,  unrelieved  by  a 
single  helpful,  constructive,  encouraging  provision 
which  I  can  now  recall. 

Mind  you,  I  am  not  saying  that  this  restrictive 
and  repressive  legislation  and  the  creation  of  the 
Commission  as  a  stern  administrator  of  the  law 
rather  than  a  helpful  agency  was  not  necessary. 
Quite  the  contrary.  Most  of  the  things  prohibited 
were  wrong. 

But  I  do  say  that  the  policy  of  hostility  and  re- 
pression was  carried  too  far,  and  the  time  has  come 
for  a  change. 

I  do  not  mean  change  by  repealing  any  of  the 
laws  or  abandoning  what  has  been  done,  but  a 
change  by  adding  to  the  repressive  and  restrictive 
laws  helpful  and  constructive  laws  and  administra- 
tive agencies  capable  of  more  expeditious  action. 

74 


THE     SOUND     REMEDY 


Transportation  Business  Should  No 
Longer  Be  Ignored  by  Government 

The  transportation  interests  of  the  country 
should  no  longer  be  ignored  in  the  organization  of 
the  Government's  business  and  left  to  what  I  may 
term  the  penal  authorities. 

Along  with — 

The  Secretary  of  Treasury 

Who  looks  after  the  banking  and  financial  interests  of 

the  country; 

The  Secretary  of  War  and  the  Secretary  of  the  Navy 
Who  look  after  national  defence; 

The  Secretary  of  Agriculture 

Who  looks  with  solicitude  after  agricultural  interests; 

The  Secretary  of  Labor 

Who  looks  after  the  interests  of  the  laborers; 

The  Secretary  of  Commerce 

Who  looks  after  the  commercial  and  industrial  welfare  of 

the  nation; 

The  Secretary  of  Interior 

Who  sees  to  the  development  of  multitudes  of  internal 

projects  of  public  interest;  and 

The  Postmaster  General 

Who  provides  the  communication  for  the  people, 

—there  should  be — 

A  Secretary  of  Transportation 

— who  should  see  that  the  nation  has  the  transpor- 
tation without  which  none  of  these  others  would 

75 


COMMENTS     ON     THE     RAILROAD     PROBLEM 

be  possible  or  of  value,  and  who  should  have  the 
same  solicitude  for  the  development  and  success 
of  this  essential  business  and  industry  that  the 
others  show  for  the  interests  they  represent. 


Thus  far  I  have  discussed  only  a  permanent 
railroad  policy. 

It  is  necessary  of  course  that  Congress  should 
provide  for  the  period  of  transition  from  existing 
Government  control  back  to  private  management, 
and  adequately  provide  for  the  difficulties  that  will 
confront  the  railroad  companies  upon  the  return  of 
their  properties  with  an  increased  wage  scale  of 
approximately  a  billion  dollars  per  annum  over  the 
scale  prevailing  when  the  railroads  were  taken  over 
by  the  Government,  and  with  prices  of  materials 
and  supplies  required  in  railroad  operations  in- 
creased in  proportion  to  other  costs  of  living, 
since,  without  provision  for  this  situation,  imme- 
diate bankruptcy  will  face  many  of  the  companies 
and  impaired  credit  will  be  the  fate  of  all. 

But  this  paper  is  already  extended  beyond  rea- 
sonable limits,  and  therefore  it  will  be  confined  to 
consideration  of  permanent  plans  without  reference 
to  temporary  measures  necessary  for  dealing  with 
the  transitory  condition. 


76 


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